The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

Abstract

Existing evidence suggests that individuals frequently misperceive the value of their wealth. We test the existence, and estimate sign and magnitude, of an inaccurate perception of individual net worth. By conducting a laboratory experiment, we find that most subjects perceive a given net worth as greater than its true value and this misperception increases for lower values of the leverage ratio i.e., liabilities-assets ratio. We identify an explanation relating this misperception to low cognitive sophistication and inattentive thinking. Finally, such wealth misperception predicts greater impatience, lower debt aversion and greater marginal propensities to consume out of positive (transitory) income shocks.

Reference

Tiziana Assenza, Alberto Cardaci, and Dominico Delli Gatti, “The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication”, TSE Working Paper, n. 19-1055, February 2021, revised February 2021.