When the majority of individuals purchase vehicles, the displayed price is merely a fraction of the overall expenditure. The additional aspect involves the financing, as individuals typically borrow funds for car acquisitions. Consequently, the interest rate, size of monthly payments, and total repayment amount are all significant considerations.
Yet, collectively, individuals tend to engage in more comparison shopping regarding vehicle prices than about lenders, often accepting comparatively costly loans. What results from higher financing costs? The conclusion is that individuals opt for older vehicles with reduced sticker prices.
“The vehicle they’re using at the moment might be a year older due to that,” notes Christopher Palmer PhD ’14, an associate professor of finance at the MIT Sloan School of Management, who contributed to discovering this trend through research analyzing millions of U.S. auto loans. This investigation aligns with much of Palmer’s focus: rooted in concrete data and illuminating issues, even those that are commonly understood, surrounding personal financial management.
“I examine household financial decision-making,” Palmer states. “Both how families reach decisions and how external elements influence those choices. That encompasses numerous factors.”
Indeed, it does. Palmer, often collaborating with co-authors, has also identified that people tend to prefer monthly payments that are multiples of $100 — which can lead them to accept less favorable financing conditions. Furthermore, since household finance includes housing, Palmer co-authored a prominent study indicating that individuals are significantly more likely to utilize housing vouchers and relocate to different neighborhoods when they receive a modest degree of aid from a “navigator” who assists with the transition.
However, he is not solely interested in behavioral anomalies: Another study by Palmer revealed that the Federal Reserve’s quantitative easing initiatives post the 2008 financial crisis aided financially-strapped individuals in refinancing their mortgages — particularly those who initially managed to provide a down payment of 20 percent or more.
In general, Palmer examines overarching economic scenarios where individuals experience financial strain and scrutinizes consumer behavior, especially related to credit.
“When assessing whether someone can afford a monthly payment, it’s crucial to understand their employment market, their future expectations, and other factors,” Palmer states. “Credit markets are connected to virtually every aspect you might be concerned about. Part of my goal in illuminating consumer credit markets is that they influence various human outcomes.”
For his contributions to research and education, Palmer was granted tenure at MIT last year.
Valuable insights
Palmer was raised in the Boston region and had a penchant for mathematics in school, while always being intrigued by how individuals made financial choices, particularly regarding real estate. As an undergraduate at Brigham Young University, he quickly discerned that he wished to apply his mathematical skills to analyze everyday occurrences.
“I appreciate the way you can utilize your intuition to solve problems while also being attuned to your surroundings and listening to the world,” Palmer reflects.
However, as a student, this did not mean that Palmer confined his interests. On the contrary, he recognized the value of broadening his academic pursuits.
“I also rapidly came to realize in college that I wanted to double major in economics and mathematics,” Palmer explains. “And that paved the way for earning a PhD.”
After completing his studies at BYU, Palmer enrolled in the doctoral program at MIT in 2008. Alongside attending classes, he immediately began working as a research assistant on a study concerning rent control in collaboration with professors David Autor — who would later be his advisor — and Parag Pathak. That research eventually resulted in several notable papers. Although rent control pertains to household finance, the specific area of household finance was not yet a recognized subdiscipline at that time.
However, that would soon change. Indeed, Palmer’s graduate experience serves almost as a case study illustrating how academic research develops and expands over time. As Palmer began his studies at MIT, the collapse of subprime lending catalyzed the financial crisis of 2008, creating greater emphasis on academic inquiry into these topics. Suddenly, the matters that had been simmering in Palmer’s mind became urgently relevant to scholarly examination.
“All of a sudden, mortgages and household finance were at the forefront,” Palmer observes. “That provided me with the opportunity to write a dissertation on how financially distressed households make mortgage choices. There was substantial interest in that.”
After earning his PhD, Palmer joined the faculty at the University of California at Berkeley, specifically at the Haas School of Business, before returning to MIT in 2017.
“Household finance as a discipline is relatively small, so you need to intersect it with another field to ensure your inquiries can influence the world,” Palmer affirms. “For me, that could involve macroeconomics, labor economics, corporate finance, or banking. This is partially why MIT is an exceptional place, as it’s easy to engage with all those domains.”
Maintaining a list of inquiries at hand
With a diverse research portfolio, Palmer must be agile in identifying subjects for in-depth study. This involves seeking relevant data pertaining to household finance and consumer credit, and framing his research around significant questions.
“A proficient microeconomist is perpetually searching for opportunities,” Palmer declares.
“I’ve always aimed to be driven by questions,” he adds. “I try to maintain a list of inquiries in mind, so that if someone presents an intriguing dataset, I may have thoughts regarding what we can delve into within the data.”
Consider the extensive research on auto loans, which emerged after a co-author approached Palmer expressing that they had discovered an interesting dataset and sought to explore its potential. One lingering question was: To what extent do individuals seek out the best car price or loan conditions?
As a graduate student, Palmer recalls, “I remember [MIT professor] Glenn Ellison once stating in class that the topic of search is exceedingly compelling. Consumers face difficult decisions, and companies do not wish to facilitate comparison shopping. Moreover, little had been done regarding search within household finance.”
Thus, Palmer and his team structured the auto-loan study partially around the search concept. The research assesses the geographic areas of millions of consumers alongside the number of lenders available within a 20-minute commute and investigates how thoroughly consumers pursue the best options. The study encompasses credit scores, vehicle prices, and loan conditions, shedding light on the intricate dynamics related to credit and vehicle acquisitions.
Optimal conduct
Some of Palmer’s research, on the other hand, takes the form of experiments. The paper he co-authored about factors aiding individuals in moving exemplifies this. Set in Seattle, the research team collaborated with local officials to establish an experiment on the matter.
It turns out that in Seattle, among individuals awarded housing vouchers to relocate to new neighborhoods, the percentage that actually utilized the vouchers soared from 15 percent to 53 percent — a startling increase — when provided with slightly more information and resources, and, most significantly, a “navigator” assisting with essential logistics.
Investigating how individuals manage their finances provides Palmer’s work with numerous insights in the realm of behavioral economics, the field that examines irrationalities — or lack thereof — in finance. Palmer regards such discoveries as significant, while underscoring that he is not primarily in pursuit of irrationality. Instead, he consistently strives to connect the study of behavior to pertinent economic and policy issues: how we borrow, our affordability, and how we react to economic pressures.
“When a behavioral study is inspired by a strong association with public policy, it immediately addresses the is-this-important criterion,” Palmer asserts. “I always aspire to produce work that a broad scholarly community would deem essential and that the wider world would find impactful.”