Heuristics and Biases in the Israeli Mortgage Market

Abstract

This research examines the three seminal heuristics that are employed in decision-making under uncertainty: availability; representativeness; and anchoring and adjustment; and their appearance in the Israeli mortgage market. We argue that the standard economic criteria are sometimes inadequate to explain household’s choices, which may be motivated by heuristic principles which reduce the complex task of choosing a mortgage. More specifically, we focus on the households’ choice between fixed rate mortgages (FRM) and adjustable rate mortgages (ARM). We empirically examine the effect of these heuristics on the decision between ARM and FRM using a unique data provided to us by the Bank of Israel, which contains detailed information on the household’s decision between fixed and adjustable rate mortgage contracts in Israel in the past decade. The results of our analysis demonstrate a significant effect of availability and representativeness heuristics on households’ decision. In addition, we show that regulatory provisions regarding the loan division between FRM and ARM may serve as a possible anchor to the borrowers.