Suboptimal Credit Card Repayments: A Laboratory Experiment

Abstract

This paper studies the sources of suboptimal allocations observed in credit card repayments using a diagnostic laboratory experiment. Using a series of treatments, we present two main findings. First, suboptimal allocations persist in extremely simple choice environments. Particularly, neither optimization ability nor limited attention to interest rate information is sufficient to explain the suboptimal allocations. Second, while increasing the vividness of interest rate information does not help subjects make better decisions, changing the negative frame of the credit card repayment problem to a positive mutual fund investment frame substantially improves the quality of decisions. Using additional treatments, we show that there are clear asymmetric patterns in the way that subjects attend to information across financial frames. These patterns are also consistent with asymmetric heuristic use. We discuss the implications of our results for developing consumer protection policies, evolution of wealth inequality, and economic models of attention.