Center for Consumer Financial Decision Making: Recent Research Projects (since 2018)

Scholars affiliated with the Center for Research on Consumer Financial Decision Making are actively conducting research on saving, investing, household debt and policy initiatives related to consumer financial decision making. This page surveys our CFDM Center scholars recent research publications and notable working papers since 2018. Please click on the links below to see Center scholars’ research on these topics.




Emily Gallagher, Jorge Sabat (2019) Rules of Thumb in Household Savings Decisions: Estimation Using Threshold Regression, 23 (September), 1-47.

The rules of thumb offered by financial advisors regarding how much to hold in liquid reserves vary widely and usually imply far greater sums than low-income households save. This paper seeks empirically-grounded insights into the minimum liquidity buffer needed by the average low-income household. First, we document diminishing benefits to liquid savings in terms of the likelihood of experiencing financial hardship. Then, we formalize this relationship with a theory of poverty traps. Finally, to observed data, we fit a regression kink model with an unknown threshold (kink) point that must be estimated. Our key finding is that the threshold point is $2,467 with a 95% confidence interval of $1,814–$3,011 (in 2019 dollars) or roughly 1 month of income for the average low-income household – which is far less than the savings amounts implied by common rules of thumb (typically 3–6 months of income). Theoretical evidence suggests that financial advice based on an empirically-estimated threshold point is welfare enhancing for households with naive perceptions of their probability of experiencing financial problems.


Tony Cookson (2018) When Saving Is Gambling. Journal of Financial Economics, 12 (July), 24-45.

Prize-linked savings (PLS) accounts — which allocate interest using lottery payments rather than fixed interest — attempt to encourage savings by appealing to households’ gambling preferences. I introduce new data on casino cash withdrawals to measure gambling, and examine how individual gambling expenditures respond to the introduction of PLS in Nebraska using a difference-in-differences design. After PLS is introduced, individuals who live in counties that offer PLS reduce gambling by at least 3% more than unaffected individuals. The substitution effect is stronger in low-frills gambling environments, which most resemble PLS, indicating that these accounts fulfill the desire to gamble.


Yanwen Wang, Muxin Zhai, John Lynch (2018) Generous to a Fault: The Effect of Employers Retirement Plan Contributions on Leakage from Cashing Out at Job Separation (working paper)

In the United States, "retirement plan leakage" occurs when employees withdraw money prior to retirement and pay a financial penalty for doing so. The vast majority of early leakage from retirement savings system occurs when employees leave a job. We analyze a large data set on employees’ 401(k) contributions and leakage decisions, and we investigate how retirement plan generosity affects the probability and amount of leakage at job termination. Our results suggest that employees respond strategically to employer-based defined contribution plans. An overly generous plan may not unambiguously incentivize employee contributions to retirement savings. The likelihood of leakage at job separation increases with the proportion of employer’s contribution relative to the employee's contribution. We explain this phenomenon using mental accounting concepts. We suggest that the employer’s contribution is likely to be labeled as "free money" and thus subject to early withdrawal. Our counterfactual analysis of how employees respond to modifications of current employer’s matching scheme supports the hypothesis.



Tony Cookson, Marina Niessner (2018) Why Don't We Agree? Evidence from an Investor Social NetworkSSRN. Journal of Finance, Forthcoming.

We study the sources of investor disagreement using sentiment expressed by investors on a social media investing platform, combined with information on the users’ investment approaches (e.g., technical, fundamental). We examine how much of overall disagreement is driven by different information sets versus differential interpretation of the same information, by studying disagreement within and across investment approaches. We find that differences of opinion across investment approaches account for 47.7% of the overall disagreement at the firm-day level. Moreover, changes in our measures of disagreement robustly forecast abnormal trading volume, suggesting that our measures proxy well for disagreement in the wider market. Our findings suggest that improvements to informational efficiency of financial markets by regulators will not completely erode high trading volume and stock market volatility.


Andrew Long, Phil Fernbach, Bart de Langhe (2018) Circle of Incompetence: Sense of Understanding as an Improper Guide to Investment Risk. Journal of Marketing Research, 55(4), 474-488.

Consumers incorrectly rely on their sense of understanding of what a company does to evaluate investment risk. In three correlational studies, greater sense of understanding was associated with lower risk ratings (Study 1) and with prediction distributions for future stock performance with lower standard deviations and higher means (Studies 2 and 3). In all studies, sense of understanding was unassociated with objective risk measures. Risk perceptions increased when we degraded sense of understanding by presenting company information in an unstructured versus structured format (Study 4). Sense of understanding also influenced downstream investment decisions. In a portfolio construction task, both novices and seasoned investors allocated more money to hard-to-understand companies for a risk-tolerant client relative to a risk-averse one (Study 5). Study 3 ruled out an alternative explanation based on familiarity. The results may explain both the enduring popularity and common misinterpretation of the “invest in what you know” philosophy.


Asaf Bernstein, Matthew Gustavson, Ryan Lewis (2018) Disaster on the Horizon: The Price Effect of Sea Level Rise, Journal of Financial Economics (forthcoming)

Homes exposed to sea level rise (SLR) sell at a 7% discount relative to observably equivalent unexposed properties equidistant from the beach. This discount has grown over time and is driven by sophisticated buyers and communities worried about global warming. Consistent with causal identification of long horizon SLR costs, (1) we find no relation between SLR exposure and rental rates, (2) despite decreased remodeling among exposed homeowners, current SLR discounts are not caused by differential investment, (3) results hold controlling for flooded properties and views. Overall, we provide the first evidence on the price of SLR risk and its determinants. These findings contribute to the mixed literature on how investors price long-run risky cash flows and have implications for optimal climate change policy. Wall Street Journal, Washington Post


Bhagwan Chowdhry, Shaun Davies, and Brian Waters (2018) Investing for Impact. The Review of Financial Studies, Volume 32, Issue 3, March 2019, Pages 864–904,

We study joint financing between profit-motivated and socially motivated (impact) investors and derive conditions under which impact investments improve social outcomes. When project owners cannot commit to social objectives, impact investors hold financial claims to counterbalance owners’ tendencies to overemphasize profits. Impact investors’ ownership stakes are higher when the value of social output is higher, and pure nonprofit status may be optimal for the highest valued social projects. We provide guidance about the design of contingent social contracts, such as social impact bonds and social impact guarantees.


Nick Reinholtz, Phil Fernbach, Bart de Langhe (2018) Do People Understand the Benefit of Diversification? (SSRN)

Diversification—investing in imperfectly correlated assets — reduces volatility without sacrificing expected returns. While the expected return of a diversified portfolio is the weighted average return of its constituent parts, the variance of the portfolio is less than the weighted average variance of its constituent parts. Our results suggest that very few people have correct statistical intuitions about the effects of diversification. Many people, especially those low in financial literacy, believe diversification actually increases the volatility of a portfolio. These people seem to believe that the unpredictability of individual assets compounds when aggregated together. Additionally, most people believe diversification increases the expected return of a portfolio. Many of these people correctly link diversification with the concept of risk reduction, but seem to understand risk reduction to mean greater return. We show that these beliefs can lead people to construct investment portfolios that mismatch investors’ risk preferences. Further, these beliefs may help explain why many investors are underdiversified. Wall Street Journal


Diego Garcia (2016) The Kinks of Financial Journalism. Working paper.

This paper studies the content of financial news as a function of past market returns. As a proxy for media content we use positive and negative word counts from general financial news columns from the Wall Street Journal and the New York Times. Our empirical analysis allows us to discriminate between theories that predict hyping good stock performance to those that emphasize negative news. The evidence is conclusive: negative market returns taint the ink of typewriters, while positive returns barely do. Given how pervasive our estimates are across multiple time periods, subject to different competitive pressures in the market for news, we conclude our results are driven by demand considerations. Financial Times.



Asaf Bernstein (2018) Negative Equity, Household Debt Overhang, and Labor Supply. SSRN

I find that negative home equity causes a 2%-6% reduction in household labor supply. I utilize U.S. household-level data and plausibly exogenous variation in the location-timing of home purchases with a single lender. Supporting causality, households are observationally equivalent at origination and equally sensitive to local housing shocks that don’t cause negative equity. Results also hold comparing purchases within the same year-MSA, that differ by only a few months. I then identify a new channel that explains as much as 1/5th of this relationship, “household debt overhang”, wherein income-contingent mortgage renegotiations act like implicit taxes, resulting in labor supply disincentives. Taken together these results provide evidence that a fall in house prices can exacerbate employment declines and highlights the potential unintended consequences of mortgage assistance programs.


Asaf Bernstein, Daan Struyven (2017) Housing Lock: Dutch Evidence on the Impact of Negative Home Equity on Household Mobility. SSRN

This paper employs Dutch administrative population data to test the “housing lock hypothesis”: the conjecture that homeowners with negative home equity, low levels of financial assets and restricted opportunities to borrow reduce their mobility. We exploit variation in home equity solely driven by the timing of home purchase within a municipality and the harshness of Dutch recourse laws, which allow us to isolate the housing lock channel. Instrumented negative home equity is associated with a 74-79% decline in mobility, and the effects are substantially larger for households with low financial asset holdings or moves over longer distances.


Nelson Camanho, Daniel Fernandes (2016) The Mortgage Illusion. SSRN

We find that home buyers are influenced by the comparison between the monthly rental payment and the monthly mortgage installment, for fixed rate mortgages. Consumers are more likely to buy real estate when the monthly rental payment is higher than the monthly mortgage installment. Our experiments show that the mortgage illusion is not caused by a desire to pay less per month for a mortgage, but by a desire to pay less each month for the rent than for the mortgage. Consumers use the monthly rental payment as a reference point to decide whether to buy a realty. Consumers with greater time discounting are more likely to display the mortgage illusion. Financial literacy and numeracy do not help to overcome this bias.


Tony Cookson, Erik Gilje and Rawley Heimer (2019) Shale Shocked: The Long-Run Effect of Wealth on Household Debt. Working paper.

We study the long-run effect of unanticipated wealth shocks on the distribution of household debt. Specifically, we focus on how $14.6 Billion in oil and gas shale royalty payments over 11 years affect the balance sheets of 404,937 consumers. We find that initially-subprime consumers decrease their credit utilization by paying down preexisting revolving debts, whereas prime consumers increase their revolving, mortgage and auto debts. Overall, household balance sheets become less risky (measured by credit scores), even though near-prime consumers have slight increases in delinquent and derogatory accounts. The effects are similar for consumers that reside inside or outside shale areas, which suggests our findings are driven by household decision making, not local economic conditions. Our findings highlight the role of heterogeneity in household balance sheets when considering how positive economic shocks affect future debt levels.


Stephen Billings, Emily A. Gallagher and Lowell Rickets, Let the Rich Be Flooded: The Unequal Impact of Hurricane Harvey on Household Debt. Working paper (2019)

Hurricane Harvey, which submerged 25–30% of Houston in August 2017, is arguably the most generalizable major flooding event. Using a treatment intensity difference-in-difference design, we find substantial heterogeneity in household debt outcomes across flooded residents according to floodplain (flood insurance) status, credit history, income, and housing equity. We observe a small relative decline in Equifax Risk Scores (1–4 points) among residents in the most flooded blocks – likely attributable to a temporary 4–20% jump in the share of debt that is severely delinquent among younger and lower credit quality borrowers living outside of the floodplain. Our most surprising finding is a roughly $2,000 (or 9%) pay down in student debt in the most flooded, higher income areas outside of the floodplain. This effect is driven entirely by people with pre-existing student loans, lower housing equity, and higher credit scores. A plausible interpretation is that some flooded households are exploiting their greater access to more fungible government assistance to eliminate their higher-interest, non-dischargeable debt rather than to rebuild. We believe that this is the first paper to evaluate student debt outcomes as well as the role of differential access to various forms of assistance following a natural disaster.



Christina Kan, Phil Fernbach, and John Lynch. (2018) Personal Budgeting in the Short Run and the Long Run. Working Paper.

Personal budgeting is commonly recommended, and about half of Americans report doing it. Surprisingly, little causal evidence exists testing the efficacy of budgeting for attaining financial goals. We find that budgeting helps people attain their financial goals in the short run, but not in the long run. People who track their budgets are more likely to reduce their net spending after periods of overspending than those who do not track their budgets, consistent with popular press touting of benefits of budgeting. However, budget trackers are also more likely to overspend after periods of fiscal restraint than those who do not track their budgets. The net effect is that budget trackers are no more likely to attain their financial goals.



Emily Gallagher, Radhakrishnan Gopalan, and Michal Grinstein-Weiss (2018) The Effect of Health Insurance on Home Payment Delinquency: Evidence from ACA Marketplace Subsidies. Journal of Public Economics, Forthcoming.

We use administrative tax data and survey responses to quantify the effect of health insurance on rent and mortgage delinquency. We employ a regression discontinuity (RD) design, exploiting the income threshold for receiving Marketplace subsidies in states that did not expand Medicaid under the Affordable Care Act. Eligibility for subsidies is associated with a roughly 26 percent decline in the delinquency rate and reduced exposure to out-of-pocket medical expenditure risk. IV results indicate that this relationship is likely causal. We show that, under plausible assumptions, the social benefits implied by our RD estimates, in terms of fewer evictions and foreclosures, are substantial relative to the transfer value of the subsidies.


Emily Gallagher, Radhakrishnan Gopalan, Michal Grinstein-Weiss, Jorge Sabat (2018) Medicaid and Household Savings Behavior: New Evidence from Tax Refunds. Journal of Financial Economics, Forthcoming.

Using data on over 67,000 low-income tax filers, we estimate the effect of expanded Medicaid access on the propensity of households to save or repay debt from their tax refunds. We instrument for Medicaid access using variation in state eligibility rules. Medicaid eligibility has no effect on the savings behavior of the average low-income household. However, among those experiencing financial hardship, Medicaid eligibility increases refund savings rates by roughly 5 percentage points or $102. Effects are stronger in states with lower bankruptcy exemption limits and are consistent with a strategic default model, in which uninsured, financially constrained households use bankruptcy to manage health expenditure risk. While modest in absolute terms, our estimates are substantial relative to the effects of direct savings interventions on low-income populations. Our results imply that, as the social safety net expands, tax rebates may be less effective in stimulating consumption


Richard Netemeyer, Dee Warmath, Daniel Fernandes, and John G. Lynch, Jr. (2018) How Am I Doing? Perceived Financial Well-Being, Its Potential Antecedents, and Its Relation to Overall Well-Being.  Journal of Consumer Research,45 (June), 68-89.

There has been little systematic examination of how perceived financial well-being may affect overall well-being. Using consumer financial narratives, several large-scale surveys, and two experiments, we conceptualize perceived financial well-being as two related but separate constructs: 1) stress related to the management of money today (current money management stress), and 2) a sense of security in one’s financial future (expected future financial security). We develop and validate measures of these constructs and then demonstrate their relationship to overall well-being, controlling for other life domains and objective measures of the financial domain. We find that perceived financial well-being is a key predictor of overall well-being and comparable in magnitude to the combined effect of other life domains (job satisfaction, physical health assessment, and relationship support satisfaction). Further, the relative importance of current money management stress to overall well-being varies by income groups and due to the differing antecedents of current money management stress and expected future financial security. We offer implications for financial well-being and education efforts.


James R. Brown, Tony Cookson, and Rawley Heimer (2018) Growing Up without Finance. SSRN. Journal of Financial Economics, Forthcoming.

Early-life exposure to local financial institutions increases household financial inclusion and improves financial health thereafter. We identify the effect of local financial markets using an externally-imposed law that led to sharp differences in credit market development across Native American reservations. Individuals who grow up on financially underdeveloped reservations enter formal credit markets later than individuals from financially developed reservations, and as a result, have persistently lower credit scores. Although financial health improves after moving from a reservation, it takes longer than a decade for the credit scores of individuals leaving financially underdeveloped areas to converge with other borrowers.


Emily Gallagher, Stephen Roll, Rourke O’Brien, Michal Grinstein-Weiss (2018) Health Insurance and the Earnings Stability of Low-Income Households. SSRN

We evaluate the effect of health insurance on negative earnings shocks using the administrative tax data and survey responses of 4,975 low-income households. We exploit exogenous variation in the cost of private insurance under the Affordable Care Act using a regression discontinuity (RD) design. Eligibility to purchase subsidized private insurance is associated with a 29 and 22 percent decline in the rates of unexpected job loss and income loss, respectively. Effects are concentrated among households with past health costs and exist only for “unexpected” forms of earnings variation, suggesting a health-productivity link. Rudimentary calculations based on our RD estimate imply a $256–$476 per year welfare benefit of health insurance in terms of reduced exposure to job loss.


Quentin André, Nick Reinholtz, John Lynch (2018) Can Food Stamps Reduce Food Consumption? The Unintended Consequences of Restricted-Use Funds on Budgeting Decisions. Working paper.

We investigate the consequences of endowing consumers with resources that can only be spent on a limited range of products. Using a policy-relevant context, we show that consumers who receive a resource akin to food stamps spend less on food than consumers who receive an equivalent amount in money do.



Ward, Adrian, and John G. Lynch, Jr. (2018) On a Need-to-Know Basis: Divergent Trajectories of Financial Expertise in Couples and Effects on Independent Search and Decision Making. Journal of Consumer Research. Summarized in US News June 14, 2018, AARP May 18 2018.

Many consumers suffer from low levels of financial literacy, and attempts to increase this dimension of consumer expertise via educational interventions are typically unsuccessful. We argue that many of these apparent deficits are caused by the distribution of responsibility for knowledge and decision-making between relationship partners. Early in relationships, responsibility for financial matters is often determined not by differences in financial expertise, but by differences in relative contributions to other domains (study 3). Although responsibility may be initially unrelated to ability, responsibility predicts learning of new financial information (study 4). Cross-sectional data from consumers in long-term relationships show that as relationships lengthen, high levels of financial responsibility are associated with increases in financial literacy, whereas low levels of financial responsibility are not (study 1). These diverging trajectories of expertise cannot be explained by role switching or changes in the sample over time (study 2). The resulting gap in financial literacy is linked to corresponding differences in both financial decision-making and financial information search (studies 5, 5a). Consumers develop expertise on a “need to know” basis. Offloading responsibility to a relationship partner may eliminate this need in the present, while simultaneously creating barriers to developing expertise when needed in the future.