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Fed/GFLEC Financial Literacy Seminar Series

May 13, 2021

12:00 PM - 1:00 PM ET

Seminar IV: Misfortune and Mistake: The Financial Conditions and Decision-Making Ability of High-Cost Loan Borrowers

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Arna Olafsson

Assistant Professor of Finance, Copenhagen Business School
Member of the Fiscal Council of Iceland

LOCATION

Online

Bio: Arna Olafsson

Arna Olafsson is an Assistant Professor of Finance at Copenhagen Business School, a research fellow at the Danish Finance Institute, a research affiliate at CEPR, and CEPR Household Finance Network Member. She received her Ph.D. from the Stockholm School of Economics in 2014. Her main areas of research are household finance, behavioral finance, consumer credit, and labor and finance. A unifying theme in her research is the application of detailed individual-level panel data to answer important questions regarding the financial lives of individuals and households. Her current research analyzes transaction-level bank data, containing information on, e.g., income, expenditures, bank account balances, and consumer credit. Furthermore, she has collaborated with her data providers to merge this data with experimental data.

Abstract

The appropriateness of many high-cost loan regulations depends on whether demand is driven by financial conditions (“misfortunes”) or imperfect decisions (“mistakes”). Bank records from Iceland show borrowers have especially low liquidity just before getting a loan, but their spending is not especially low in the days before the loan arrives and some spend a substantial fraction of the loans on seemingly inessential items. Borrowers exhibit lower decision-making ability (DMA) in linked choice experiments: 45% of loan dollars go to the bottom 20% of the DMA distribution. Standard determinants of demand do not explain this relationship, which is also mirrored by the relationship between DMA and an unambiguous “mistake.” Both “misfortune” and “mistake” thus appear to drive demand.