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THE JOURNAL OF BEHAVIORAL FINANCE, 11: 82–91, 2010 Copyright C The Institute of Behavioral Finance ISSN: 1542-7560 print / 1542-7579 online DOI: 10.1080/15427560.2010.481981

Psychological and Cultural Factors in the Choice of Mortgage Products: A Behavioral Investigation
Masaki Mori
International University of Japan

Julian Diaz III and Alan J. Ziobrowski
Georgia State University

Nico B. Rottke
European Business School

Using data from three countries that differ economically, culturally, and geographically, this study examines the role of Prospect Theory’s reflection effect, a psychological factor, in combination with Uncertainty Avoidance (UA), a cultural factor, on the choice of mortgage products. Experiments were conducted using business professionals in the United States, Germany, and Japan. The results suggest that risk-averse people tend to become more risk seeking, leaning more toward adjustable-rate mortgages (ARMs) when choosing a mortgage type, and that this psychological effect may underlie the mortgage choices of people who tend to choose ARMs, even across countries with different cultures.

Keywords: Adjustable-rate mortgage, Fixed-rate mortgage, Prospect theory, Uncertainty avoidance, Experiment

INTRODUCTION In terms of household risk management, the choice of a residential mortgage is one of the most significant decisions to make. At the end of second-quarter 2005, the value of outstanding U.S. residential mortgages was $8 trillion, 65% of the 2005 GDP (Federal Reserve Board of Governors [2005] In Germany, the residential mortgage debt ratio as a percentage of GDP was 51% at the end of 2006 (European Mortgage Federation). In Japan, the value of outstanding residential mortgages was 190 trillion Yen in 2005, which was 36% of the GDP (The Government Housing Loan Corporation, Japan) The choice of residential mortgages, which determines

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