A Neurological Explanation of Strategic Mortgage Default

Michael J. Seiler, Eric Walden

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

This study examines strategic mortgage default on a neurological level. Specifically, we test two mainstream behavioral finance/economic theories: sunk cost fallacy and cognitive dissonance. Using fMRI technology, we identify a number of substrates within the brain that provide a neurobiological explanation for why some homeowners exercise their mortgage put option while others do not. We find that borrowers rationally do not suffer from the sunk cost fallacy as it relates to strategic default in that they significantly prioritize their negative equity position over the amount of their initial down payment. We do, however, find neurological support that cognitive dissonance is relevant in homeowners’ thought processes as they toil with the hesitancy brought on by the believe that strategic default is immoral against the strong financial incentive to walk away from a substantially underwater mortgage.

Original languageEnglish
Pages (from-to)215-230
Number of pages16
JournalJournal of Real Estate Finance and Economics
Volume51
Issue number2
DOIs
StatePublished - Aug 25 2015

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Keywords

  • Forensic real estate
  • Neurological real estate
  • Strategic mortgage default
  • fMRI

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