Payment/Interest Bias Shapes Business Strategy
The information design of financial products and services is very sensitive to the cognitive biases of consumers. A great example of this is the payment/interest rate bias. Because of this bias most of us will tend to underestimate the interest rate on a loan when we are given information about the monthly payment and duration – or the stream of payments we have to make to repay the loan.
So in practice, we tend to take higher interest rate loans if we are only (or mostly) shown information on monthly payments and duration. A study by two business professors from Dartmouth show just how far this effect can go:
”Firms provide frames that cater to bias, and biased consumers sort into different contracts than unbiased consumers. This leads to segmentation across firms in how they present information to consumers, which customers they attract, and equilibrium prices”.
The market segments by cognitive bias!
This effect was found, according to to study, in non-banking lending practices only.
