Using Asymmetric Dominance to Resolve Toxic Debt: Combining Online and Field Experiments

Abstract

This study employs a behavioral technique known as asymmetric dominance used to nudge defaulted borrowers toward a repayment option that is in their best interest (lowest implied APR) while at the same time encouraging greater repayment, resulting in a win-win for both lenders and borrowers. We demonstrate the efficacy of this approach through an online experiment and then through a field experiment of 1st- and 2nd-lien actual defaulted mortgage pools. We address the generalization of asymmetric dominance by documenting success across multiple consumer asset classes – mortgages, auto loans, payday loans, student loans, health care debt and credit card debt. Finally, our results hold across 2-, 3-, and 4-digit monthly repayment amounts.

Keywords:

• Field experiment
• online experiment
• asymmetric dominance
• behavioral finance
• decoy effect

JEL CLASSIFICATION CODES:

• C91
• C93
• D90
• G21
• G51
• G53

Notes

1 Improving debt collections can drive broadly beneficial economic impacts by reducing foreclosure externalities, such as reduced property values and lower access to credit (Anenberg & Kung, 2014; Brevoort & Cooper, 2013; Campbell et al., 2011; Fisher et al., 2015; Gerardi et al., 2015; Harding et al., 2009; Li, 2017).

2 See Collins et. al (2015) and Seiler (2014, 2015a, 2015b, 2016) for a detailed discussion of strategic mortgage default decision-making.

3 See http://www.action-design.org/behavioral-teams-directory, https://behavioralscientist.org/who-is-doing-applied-behavioral-science-results-from-a-global-survey-of-behavioral-teams/ and https://steveshuconsulting.com/2018/07/companies-involved-behavioral-economics/ for a growing list of firms and organizations that regularly use behavioral experiments in their work.

4 An experimental research design is extremely helpful for understanding how borrowers make decisions (Bellemare et al., 2008; Bhutta et al., 2017). However, a randomized control trial field study is the gold standard for understanding borrower behavior.

5 Other papers on the decoy effect include the following: Ratneshwar et al. (1987); Simonson (1989); Wedell (1991); Mishra et al. (1993); Redelmeier and Shafir (1995); Highhouse (1996); Herne (1997); Herne (1998); Schwartz and Chapman (1999); Slaughter et al. (1999); Slaughter (2007); Lombardi (2009); Clippel and Eliaz (2012); Gerasimou (2013); and Ok et al. (2014).

6 While new originations require lenders to disclose the APR of a loan, this is not the case for defaulted debt sold to debt collection agencies.

7 As all of the payday loan scenarios had decoys, we are unable to assess the effectiveness for payday loans.

8 The difference is significant with a p value of 0.035 in Column (7).

9 We consider personality traits because the previous literature has found that they influence decision-making (Borghans et al., 2008; Guiso et al., 2008; Kaplan et al., 2012; Lo et al., 2005; Peterson, 2007; Puri & Robinson, 2007). However, our results are the same when personality types are omitted.