Consumers cannot deal with interest rates
Consumers often have to make decisions involving computations with interest rates. It is well known from the literature that computations with percentages and thus with interest rates amount to a difficult task. We survey a large group of consumers, and we find that questions on interest rates are answered correctly in about 20% of the cases, which in our setting amounts to a random choice. Additional to the available literature, we also document that consumers are too optimistic in the sense that they believe loans are paid off sooner than is true, which provides empirical evidence of self-serving bias. We further find that optimism can be reduced by increasing the monthly payments. The results are robust to corrections for general numeracy.
|Keywords||D14, D91, financial innumeracy, interest rates, numeracy, percentages|
|Publisher||Erasmus School of Economics (ESE)|
Franses, Ph.H.B.F, & Vlam, A. (2011). Financial innumeracy (No. EI 2011-01). Report / Econometric Institute, Erasmus University Rotterdam (pp. 1–21). Erasmus School of Economics (ESE). Retrieved from http://hdl.handle.net/1765/22234