Risk of Over-Indebtedness and Behavioural Factors

Abstract

Works in behavioural economics have made an important contribution in drawing attention to the role played not only by socio-demographic and economic variables, but also by behavioural factors as determinants of the demand for debt. As explained in Chapter 2, empirical analyses show that household debt demand seems less rational but more driven by emotional factors, such as overconfidence, impulsivity in consumption attitudes, social comparison and myopia; that is, the inability to perceive the long run consequences of today’s debt decisions. Such behavioural factors may induce individuals to make ‘non-rational’ borrowing choices and this may lead them to hold a level of debt that is unsustainable in relation to their earnings. In turn, such a situation may cause over-indebtedness.

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