Time Inconsistency and Overdraft Use: Evidence from Transaction Data and Behavioral Measurement Experiments

Florian Hett, Chair, Digital Economics Group, Johannes Gutenberg University Mainz

Absract: Households regularly fail to make optimal financial decisions. But what are the underlying reasons for this? Using two conceptually distinct measures of individual time inconsistency, one based on bank account transaction data and one based on behavioral measurement experiments, we show that the excessive use of bank account overdrafts is linked to time inconsistency. By contrast, there is no correlation between a survey-based measure of financial literacy and overdraft usage. Our results indicate that consumer education and information may not suffice to overcome mistakes in households' financial decision-making, specifically the excessive use of overdrafts. Rather, our results suggest that behaviorally motivated interventions targeting specific biases in decision-making should also be considered as potentially effective policy tools.

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