Do Consumers Choose the Right Credit Contracts?

We analyze an experiment conducted by a large U.S. bank that offered consumers a choice between two credit card contracts, one with an annual fee but a lower interest rate and one with no annual fee but a higher interest rate. We find that on average consumers chose the credit contract that minimizes their costs. A substantial fraction of consumers (about 40%) still chose the suboptimal contract. Nonetheless, the probability of choosing the suboptimal contract declines with the dollar magnitude of the potential error, and consumers with larger errors are more likely to subsequently switch to the optimal contract.

Agarwal, Sumit and Chomsisengphet, Souphala and Liu, Chunlin and Souleles, Nicholas S., Do Consumers Choose the Right Credit Contracts? (March 18, 2015). The Review of Corporate Finance Studies, Forthcoming , Available at SSRN: https://ssrn.com/abstract=2478170 or http://dx.doi.org/10.2139/ssrn.2478170