Misfortune and Mistake: The Financial Conditions and Decision-making Ability of High-cost Loan Borrowers

Leandro Carvalho, Arna Olafsson, Dan Silverman

NBER Working Paper No. 26328
Issued in September 2019
NBER Program(s):Public Economics Program

This paper studies the relationship between adverse financial conditions (“misfortunes”), imperfect decision-making (“mistakes”), and the demand for high-cost credit. Imperfect choices are hard to identify; unobserved factors can justify many behaviors as optimal. We address this by linking administrative and experimental data. Bank records from Iceland detail the financial conditions associated with high-cost loan demand. The experiments manipulate constraints, while holding preferences and beliefs constant, to identify choice imperfections and measure decision-making ability. We then relate loan demand to decision-making ability and measures of constraints and preferences. High-cost borrowers are especially illiquid in the days leading up to getting a loan. They also have much lower decision-making ability: 28% of loan dollars are lent to the bottom 10% of the decision-making ability distribution, and 53% are lent to the bottom 20%. The relationship between decision-making ability and loan demand is not explained by demographic characteristics, granular information on financial conditions, or measures of preferences from the experiments, and is mirrored by the relationship between decision-making ability and an unambiguous “mistake,” the accrual of insufficient fund fees. Estimates from U.S. survey data are quantitatively similar. The results thus provide evidence that both misfortune and mistake are important for high-cost loan demand.

You may purchase this paper on-line in .pdf format from ($5) for electronic delivery.

Access to NBER Papers

You are eligible for a free download if you are a subscriber, a corporate associate of the NBER, a journalist, an employee of the U.S. federal government with a ".GOV" domain name, or a resident of nearly any developing country or transition economy.

If you usually get free papers at work/university but do not at home, you can either connect to your work VPN or proxy (if any) or elect to have a link to the paper emailed to your work email address below. The email address must be connected to a subscribing college, university, or other subscribing institution. Gmail and other free email addresses will not have access.


Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w26328

NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us