Time preferences and mortgage choice

Authors

Stephen A. Atlas, University of Rhode Island
Eric J. Johnson, Columbia Business School
John W. Payne, Fuqua School of Business

Document Type

Article

Date of Original Version

6-1-2017

Abstract

Mortgage decisions have important consequences for consumers, lenders, and the state of the economy more generally. Mortgage decisions are also prototypical of consumer financial choices that involve a stream of expenditures and consumption occurring across time. The authors use heterogeneity in time preferences for both immediate (present bias) and long-term outcomes to explain a sequence of mortgage decisions, including mortgage choice and the decision to abandon a mortgage. The authors employ an analytic model and a survey of mortgaged households augmented by zip code-level house price and foreclosure data. The model suggests and data confirm that consumers with greater present bias and long-term discounting tend to choose mortgages that minimize up-front costs. However, greater present bias decreases homeowners' willingness to abandon a mortgage, locking them into the contract. Long-term patience increases mortgage abandonment. This reversal across mortgage decisions is difficult for alternative accounts to explain. These results suggest that a two-parameter model of time preferences is helpful for understanding how homeowners make mortgage decisions.

Publication Title, e.g., Journal

Journal of Marketing Research

Volume

54

Issue

3

Citation/Publisher Attribution

Atlas, Stephen A., Eric J. Johnson, and John W. Payne. "Time preferences and mortgage choice." Journal of Marketing Research 54, 3 (2017): 415-429. doi: 10.1509/jmr.14.0481.