Perceived wealth, cognitive sophistication and behavioral inattention

Research Area: Household Finance
Researcher: Tiziana Assenza,
Alberto Cardaci,
Domenico Delli Gatti
Date: 1.12.2019

Abundant studies show that individuals often struggle and frequently fail to form a correct perception of how much they are worth in terms of income or net wealth, both in absolute terms and relative to others. The authors find that wealth misperception arises even in a frictionless environment. They show that this wealth misperception is related to low cognitive abilities and inattention, and that subjects who misperceive wealth have a greater tendency to borrow and spend out of gains. A standard optimal consumption choice model, enriched with a rational but inattentive agent à la Gabaix aligns the key experimental findings.

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