The Role of Prospect Theory in the Perceived Moral Reprehensibility of Strategic Mortgage Default

Abstract

Defaulting on a mortgage is widely viewed as being immoral, but no prior study has examined the intervening roles of Prospect Theory and default intent. We find that the public is significantly more accepting of a defaulting borrower who earns a zero or negative return on his investment than one who earns a positive return. This moral viewpoint changes significantly when the default is strategic in nature. Defaulters are judged significantly less harshly by those who more so blame the lender for the current financial crisis, those who have previously strategically defaulted, and males. When asked to suggest a “morally appropriate” settlement offer to lenders to resolve the distressed debt, beyond the prospect theory and default intent remaining significant, we further find that those who more so blame the lender, those who view their home as more of an investment rather than a consumption good, those who have previously strategically defaulted, those with lower income levels, and minorities suggest significantly lower settlement offers.