The opportunity cost of debt aversion.
By: Marquina, Alejandro Martínez and Shi, Mike
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Material type: 
BookPublisher: The American Economic Review Description: 114(4), Apr, 2024: p.1140-1172.Subject(s): Opportunity Cost, Debt Aversion, Financial Decisions, Experimental Design, Random Debt Assignment, Debt-Biased Decisions, High Returns, Debt Repayments, Borrowing to Invest, Indebtedness, Savings Perception, Guaranteed Investment, Cost of Borrowing, Economic Behavior, Risk Assessment, Investment Strategy, Behavioral Finance, Credit Constraints, Decision-Making, Debt Psychology
In:
The American Economic ReviewSummary: We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects' debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/aer.20221509
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Articles
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Indian Institute of Public Administration | 114(4), Apr, 2024: p.1140-1172 | Available | AR132082 |
We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects' debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive $1 less in debt as equivalent to $1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent.- Reproduced
https://www.aeaweb.org/articles?id=10.1257/aer.20221509
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