The Econophysics Blog

This blog is dedicated to exploring the application of quantiative tools from mathematics, physics, and other natural sciences to issues in finance, economics, and the social sciences. The focus of this blog will be on tools, methodology, and logic. This blog will also occasionally delve into philosophical issues surrounding quantitative finance and quantitative social science.

Sunday, August 27, 2006

Applying Behavioral Economics to Consumer Finance

This month's issue of the NBER Digest had an article on how a group of economists carried out a field experiment in behavioral economics (which uses tools from psychology to expand upon traditional notions of rationality in economics): A Field Experiment in the Consumer Credit Market. The academics -- from the University of Chicago, Harvard, Yale, Princeton, and Dartmouth -- used psychological factors in marketing consumer loans in South Africa. The researchers found that "a firm can exploit consumers' psychological biases, thereby increasing demand without lowering prices." What was most impressive about their field experiment was that their methods allowed the lender to create demand for loans equivalent to dropping the interest rate by 1 to 4 % without having to actually drop the interest rate!

A preliminary draft of the research paper can be found here.

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