Greek Private Debt and Behavioral (Law &) Economics

Human beings are less rational than we assume. Nowadays, abundant laboratory and field experiments show that we systematically fail to behave, decide or act rationally, i.e., to act as maximizers of our own utility; the so-called “homo oeconomicus” does not actually exist. These assumptions have led to the emergence of Behavioral Economics. When the findings of Behavioral Economics are used in the field of Law, we then enter the field of Behavioral Law & Economics (BLE). This is an interdisciplinary meeting point for Law, Economics and Psychology (see recently in Greek legal literature: Karampatzos, Private Autonomy and Consumer Protection – A Contribution to Behavioral Economic Analysis of Law, 2016). BLE flourished in the US especially in the aftermath of the subprime lending crisis. Various public policy instruments have been explored since then with the intent to enhance consumer protection in bank loan agreements. In my presentation I focus on some major BLE findings in relation to the problem of private bank lending, and more specifically of the “Non-Performing-Loans” (NPLs). Inter alia, I discuss the following issues related to a BLE approach: (a) Why resort to excessive borrowing, especially in case you are not in bad need of financing? (→ mainly because of overconfidence bias, present-bias and hyperbolic discounting). (b) Do Borrowers Really Need Protection? What about the So-called “Learning-Effect”? (c) Free-Riders, Strategic Default and Moral Hazard in combination with the twin phenomena of “herding/herd behavior” and “social mimetism”. (d) Possible Proactive Measures for Borrowers’ Protection Pursuant to BLE findings (→ light-touch state interventions, such as properly designed default rules, informational duties and short cooling-off periods after the conclusion of a bank loan agreement). My presentation ends with the following two main conclusions: (a) The BLE approach may offer some valuable insights into the borrower’s behavior at the time they enter into excessive borrowing or they decide to go down the path of “strategic default”. (b) The Greek banks experience great difficulties offloading their NPLs; probably, there is here a need for more active involvement of institutional actors, such as the ECB or the Bank of Greece as well as of debiasing tools offered by the research done in the field of BLE.