Three Essays on Behavioral Barriers for Financial Choices

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Kim, Inhwa
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Middle Tennessee State University
One of the drawbacks of most amazing phenomena in human consciousness is the ability to worry about the future. I know the future exists, but I don't know what will happen in that future. Uncertainty itself induces many different consequences, especially for humans. The unique thing about humans is their ability to reflect on the fact that these future events are unknown or unpredictable. In ambiguous or unpredictable situations, many individuals look for clues in the environment or use what they know from past experiences to make their predictions. Under uncertainty, there is considerable heterogeneity in expectations of results, and the outcome of each choice is a reflection of those expectations. I focus especially on behavioral and cognitive inference among the characteristics of individuals used in the financial decision-making process. In addition, I examine the impacts of risk preference on long-term financial decisions. The first chapter investigates intertemporal choices using survey data from the psychology research pool at Middle Tennessee State University. I find that subjective probabilistic inference results in different levels of information acquisition, which plays a central role in many everyday cases of forecasting. As uncertainty increases, generated fear of losses turns into an obstacle to the information acquisition process, and especially participants with low probabilistic inference tend to overestimate or underestimate future unknown rewards. Chapter 2 builds a theoretical foundation that allows me to draw possible explanations of choice behaviors which can be represented by time preferences or risk preferences. I concentrate on individual preferences that are often driven by irrelevant factors and they are inconsistent. Those inconsistency and irrationality cannot be explained by normalization theories. Time preference and risk preference have become representative tasks, and rewards forecasting under uncertainty regards as the main factors in decision making research. This framework presents the sufficient conditions of preference arising from incomplete predictions for the future. Chapter 3 concentrates on mortgage decision-making procedures which is related with long-term financial decision under uncertainty. Using the National Survey of Mortgage Originations (NSMO) data, I examine the effect of risk preference and information acquisition ability on whether a borrower has mortgage refinancing, and whether the borrower decides to add the closing costs to the new amortization schedule. In addition, I provide a possible explanation of black or African Americans' lower homeownership in the U.S. compared to white Americans, not only black and African Americans' poor understanding of the mortgage process, but also dissatisfaction with mortgage contracts they signed adversely and negatively affects their desire for a continuous building of wealth through homeownership. Three studies provide evidence on 1) the importance of information acquisition on long-term financial choices; 2) less impact of risk preference on likelihood of choices under unknown uncertainty; and 3) a practical example of long-term financial choices under uncertainty: mortgage and refinancing decisions. Implications are addressed in each study.
Information acquisition, Intertemporal choices, Mortgage, Racial wealth gap, Time and risk preference, Uncertainty, Economics