The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

Existing evidence suggests that individuals frequently misperceive the value of their wealth. We test existence, and estimate sign magnitude, an inaccurate perception individual net worth. By conducting a laboratory experiment, we find most subjects perceive given worth as greater than its true this misperception increases for lower values leverage ratio i.e., liabilities-assets ratio. identify explanation relating to low cognitive sophistication inattentive thinking. Finally, such wealth predicts impatience, debt aversion marginal propensities consume out positive (transitory) income shocks.