Essays on Understanding Consumer Decision Making: Mortgage Choice and Consumption and Investment Behaviour

Abstract

Consumer decision making impacts short-term and long-term financial welfare. We study two important aspects of consumer financial behaviour by using both revealed and stated preference data. The first is mortgage decision making which is inherently complex. The second is consumption and investment behaviour in response to a large shock in the form of a natural disaster. Many people find mortgage choice decisions daunting and confusing because mortgage products have many attributes that can be hard to understand and difficult to compare. We provide an overview of the conditions in the Australian mortgage market and present preliminary evidence on complexity and sources of consumer confusion in mortgage choice. We then conduct focus groups followed by a two-part choice experiment. We collect stated preference data via a best-worst task and a discrete choice experiment based on our preliminary focus group study. We find that Australian consumers express highly variable relative confusion about common mortgage attributes and that they tend to place less importance on attributes that they find most confusing. Borrowers generally prefer mortgages from major banks, shorter loan terms, variable and fixed interest rates over hybrid rates, lower establishment fees, principal and interest repayment schedules over interest-only repayments, and the flexibility of early repayments, and these preferences transmit into willingness-to-pay for preferred attributes. However, compared with non-advised consumers, mortgage-broker-advised consumers express preferences that align with broker incentives to tilt consumers to high-volume and longer-term home loans. We next use individual revealed preference data from a FinTech app (Raiz) to investigate the effects of increasingly common major Australian natural disasters on consumer spending, saving and investment. We measure responses to disasters in 2017-19 in terms of immediate and subsequent spending and in terms of usage of automated saving and investment features. Our findings are consistent with life-cycle theory that an increase in anticipated risks encourages many consumers to increase precautionary savings as a buffer stock against future disasters and that consumers tend to return to normal spending patterns after a transitory shock.