Mental Accounting In The Housing Market

The authors report evidence that salience may have economically significant effects on homeowners' borrowing behavior, through a bias in favor of less salient but more costly loans. They outline a simple model in which some consumers are biased. Under plausible assumptions, the bias may affect prices in equilibrium. Market data support the predictions of the model. This paper examines certain aspects of a decision faced by many households: making a debt-financed acquisition of a home. They document some strong indications that borrowing decisions are not always rational in the housing market.