Enhancing optimal consumption: Experimental insights into nudging borrowing behavior via a life cycle model

Abstract

Consumer credit is a vital tool for achieving optimal consumption across an individual's lifetime. However, owing to cognitive limitations and individual biases regarding credit usage, irrational borrowing behaviors often prevent consumers from reaching their optimal consumption levels. This paper investigates how to nudge borrowing behavior to achieve optimal consumption decisions through an intertemporal consumption decision experiment based on a life cycle model. Focusing on two dimensions—the causes of irrational borrowing behavior and the types of nudge approaches—this study designs four nudging interventions: default consumption, policy communication, strategy advice, and case learning. The experimental results indicate that individual consumption behavior deviates from the theoretically predicted optimal level. Notably, default consumption and case learning significantly enhance consumption optimization through both cognitive-oriented mechanisms, which address deviations due to cognitive limitations, and affective-oriented mechanisms, which counter individual biases, such as debt aversion or a preference for saving. Strategy advice, while effective through cognitive-oriented mechanisms, does not engage affective-oriented mechanisms and thus does not significantly reduce consumption deviations. Moreover, the effectiveness of these nudging approaches is influenced by individual characteristics such as gender, education level, financial literacy, risk attitudes, and patience. Importantly, the nudge approaches of default consumption and case learning are effective not only among student subjects but also among non-student subjects. The findings of this paper provide behavioral evidence for the design of policies aimed at achieving optimal consumption through improved borrowing decisions.