Showing papers by "Lorenz Goette published in 2010"

Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data

Abstract: The exact cause of the massive defaults and foreclosures in the U.S. subprime mortgage market is still unclear. This paper investigates whether a particular aspect of borrowers' financial literacy - their numerical ability - may have played a role. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 or 2007 and match these measures to objective data on mortgage characteristics and repayment performance. We find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured level. The result is robust to controlling for a broad set of sociodemographic variables and not driven by other aspects of cognitive ability or the characteristics of the mortgage contracts. Our results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis.

Reducing Foreclosures: No Easy Answers

Abstract: This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. We use an economic model to focus on two key decisions: the borrower's choice to default on a mortgage and the lender's subsequent choice whether to renegotiate or modify the loan. The theoretical model and econometric analysis illustrate that unaffordable loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. In addition, this paper provides theoretical results and empirical evidence supporting the hypothesis that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications to date than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events rather than modifying loans to make them more affordable on a long-term basis.

Prosocial Motivation and Blood Donations: A Survey of the Empirical Literature.

Abstract: Recent shortages in the supply of blood donations have renewed the interest in how blood donations can be increased temporarily. We survey the evidence on the role of financial and other incentives in eliciting blood donations among donors who are normally willing to donate pro bono. We present the predictions from different empirical/psychological-based theories, with some predicting that incentives are effective while others predict that incentives may undermine prosocial motivation. The evidence suggests that incentives work relatively well in settings in which donors are relatively anonymous, but evidence indicates also that when image concerns become important, incentives may be counterproductive as donors do not want to be seen as greedy.

Group Membership, Competition, and Altruistic versus Antisocial Punishment: Evidence from Randomly Assigned Army Groups

Abstract: We investigate how group boundaries, and the economic environment surrounding groups, affect altruistic cooperation and punishment behavior Our study uses experiments conducted with 525 officers in the Swiss Army, and exploits random assignment to platoons We find that, without competition between groups, individuals are more prone to cooperate altruistically in a prisoner's dilemma game with in-group as opposed to out-group members They also use a costly punishment option to selectively harm those who defect, encouraging a norm of cooperation towards the group Adding competition between groups causes even stronger in-group cooperation, but also a qualitative change in punishment: punishment becomes antisocial, harming cooperative and defecting out-group members alike These findings support recent evolutionary models and have important organizational implications

Overconfidence is a social signaling bias

Abstract: Evidence from psychology and economics indicates that many individuals overestimate their ability, both absolutely and relatively We test three different theories about observed relative overconfidence The first theory notes that simple statistical comparisons (for example, whether the fraction of individuals rating own skill above the median value is larger than half) are compatible (Benoit and Dubra, 2007) with a Bayesian model of updating from a common prior and truthful statements We show that such model imposes testable restrictions on relative ability judgments, and we test the restrictions Data on 1,016 individuals' relative ability judgments about two cognitive tests rejects the Bayesian model The second theory suggests that self-image concerns asymmetrically affect the choice to get new information about one’s abilities, and this asymmetry produces overconfidence (Kőszegi, 2006; Weinberg, 2006) We test an important specific prediction of these models: individuals with a higher belief will be less likely to search for further information about their skill, because this information might make this belief worse Our data also reject this prediction The third theory is that overconfidence is induced by the desire to send positive signals to others about one’s own skill; this suggests a either a bias in judgment, strategic lying, or both We provide evidence that personality traits strongly affect relative ability judgments in a pattern that is consistent with this third theory Our results together suggest that overconfidence in statements is most likely to be induced by social concerns than by either of the other two factors

Financial Literacy and Subprime Mortgage Delinquency: Evidence from a Survey Matched to Administrative Data

Abstract: Working Paper 2010-10 April 2010 Abstract: The exact cause of the massive defaults and foreclosures in the U.S. subprime mortgage market is still unclear. This paper investigates whether a particular aspect of borrowers' financial literacy-their numerical ability--may have played a role. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 or 2007 and match these measures to objective data on mortgage characteristics and repayment performance. We find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared with the group with the lowest measured level. The result is robust to controlling for a broad set of sociodemographic variables and not driven by other aspects of cognitive ability or the characteristics of the mortgage contracts. Our results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis. JEL classification: R2, D1, D8 Key words: subprime mortgage, delinquency, default, financial literacy, cognitive ability, survey I. Introduction The expansion of credit in the early-to-mid 2000s has had a profound impact on real estate and financial markets. In a very short time, it has broadened homeownership, particularly among individuals that had traditionally been shut out of credit markets. This growth occurred despite lagging income growth in these groups over the same time, and also in areas in which little house price growth could be expected (Mian and Sufi, 2009a). Moreover, on top of broadening homeownership rates, the expansion of credit has also led to a substantial increase in borrowing by previous homeowners taking advantage of quickly rising home prices over the same period of time: Evidence suggests that they borrowed as much as 30 cents for every dollar increase in the value of their homes (Mian and Sufi, 2009b). Improved access to credit as such offers the benefits of consumption smoothing over time. The standard model in economics assumes that agents are rational and fully understand their environment. In such a model, making more credit available will unambiguously increase welfare, and so from that perspective the expansion of credit was viewed by many as welfare-enhancing. However, as house prices leveled off in 2006 and began to decline, this was accompanied by a massive increase in late payments on subprime mortgages, and an explosion of outright defaults (e.g. Foote et al., 2008b; Mayer et al., 2009). This led to a sharp drop in the value of mortgage-backed securities and to the worst financial and macroeconomic crisis since the Great Depression. In light of these dramatic developments, a debate has started over how to explain the increase in late mortgage payments and defaults, which precipitated the broad economic and financial crisis. Several papers discuss the role of credit supply changes, and in particular the potential role of relaxed underwriting standards in generating an expansion of mortgage credit (e.g., Gerardi et al., 2009; Mian and Sufi, 2009a; Nadauld and Sherlund, 2009). By contrast, this paper examines the borrower side. Many market observers, including Akerlof and Shiller (2009), believe that departures from full rationality are an important factor in explaining the decline of the subprime mortgage market and the subsequent foreclosure crisis. In part, "irrational exuberance" (Shiller, 2005)--the belief that house prices will just keep rising--may have played a role. But Akerlof and Shiller (2009) and others (e.g., Boeri and Guiso, 2007) argue that individuals' limited ability to make complicated financial decisions contributed importantly to the sharp rise in mortgage defaults. …

Blood donor motivation: what is ethical? What works?

Abstract: The retention of previous donors and the recruitment of new donors is a serious challenge for many blood donation services in their effort to prevent blood shortages. More and more services make use of some sort of donation incentives. However, the use of (material) incentives to motivate blood donors is fiercely controversial, and there is a longstanding (ethical) debate about whether it should be allowed that donors receive material rewards. Interestingly, this debate is dealt with in almost complete absence of systematic empirical evidence on the effectiveness of material incentives in encouraging people to donate. In this article, we argue that the discussion on what is ethical in motivating blood donors should be enriched with empirical evidence based on field experiments. We confront the Titmuss controversy with recent results from an experiment administering lottery tickets as a motivation device. Moreover, we take up a neglected phenomenon in the study of blood donors: many nondonors are not principally against donating blood; they have just never made up their mind about becoming active blood donors. We propose active decisions as a mechanism to transform latent prosocial preferences into actual prosocial behaviour.

Self Selection Does Not Increase Other-Regarding Preferences among Adult Laboratory Subjects, but Student Subjects May Be More Self-Regarding than Adults

Abstract: We measure the other-regarding behavior in samples from three related populations in the upper Midwest of the United States: college students, non-student adults from the community surrounding the college, and adult trainee truckers in a residential training program. The first two groups were recruited according to procedures commonly used in experimental economics and therefore subjects self-selected into the experiment. Because the structure of their training program reduced the opportunity cost of participating dramatically, 91% of the solicited trainees participated in the third group, so there was little scope for self-selection in this sample. We find no differences in the elicited other-regarding preferences between the self-selected adults and the adult trainees, suggesting that selection into this type of experiment is unlikely to bias inferences with respect to non-student adult subjects. At the same time, we find a large difference between self-selected students and self-selected adults: the students appear considerably less pro-social.