How Much Does Psychology Matter? A Field Experiment in the Consumer Credit Market

Numerous laboratory experiments document behavior inconsistent with economic models of rational maximization. How much do these inconsistencies matter in natural settings, when consumers make large, real decisions and have the opportunity to learn from experiences? We report on a field experiment designed to address this question. Incumbent clients of a lender in South Africa were sent letters offering them large, short-term loans at randomly chosen interest rates. Psychological “cues” on the letter, which did not affect offer terms or economic content, were also independently randomized. Consistent with standard economics, the interest rate significantly affected loan take-up. Inconsistent with standard economics, though, the psychological cues also significantly affected take-up. The two independent randomizations allow us to quantify the relative importance of psychological cues and prices. Our core finding is the sheer magnitude of the psychological effects. Any one manipulation has the same effect as a one to two percentage point change in the monthly interest rate. Interestingly, psychological factors appear more important for less advantageous offers. Moreover, psychological cues do not appear to draw in marginally worse clients, nor does the magnitude of the psychological effects vary systematically with income or education. In short, even in a market setting with large stakes and experienced customers, subtle psychological cues appear to be extremely powerful drivers of behavior.