Dampening focusing illusion to protect borrowers

Abstract

Focusing illusion describes how people, when making choices, give disproportionate attention and weight to attributes in which their options differ more. It can lead to harmful loan consumption because when considering a loan, one may attend excessively to the difference between getting the loaned amount and not, while ignoring the differences between making and not making repayments. In two experiments, we demonstrate that the effect of focusing illusion in loan decisions can be dampened by carefully designing the set of plans offered. The crux is to offer a steeply-decreasing installments plan alongside the usual fixed installments plan so that consumers are less likely to borrow, because the decreasing plan attracts attention to making repayments. We conclude that policy may combat against harmful loan consumption by prescribing joint presentation of loan offers such that at least one option includes high initial repayments, dampening the salience of getting the good.