When individuals purchase vehicles, the sticker price represents only a portion of the overall expense. The remaining cost is tied to financing, as most buyers typically take out loans for their auto purchases. Consequently, the interest rate, monthly payment amount, and total repayment costs are also critical factors.
Nevertheless, on the whole, people tend to engage in more extensive comparison shopping for car prices than for loan providers, often opting for loans that are comparatively more expensive. What is the outcome of higher financing costs? Many will end up with older cars that come with lower sticker prices.
“The vehicle they are currently driving might be a year older because of this,” states Christopher Palmer, PhD ’14, an associate professor of finance at the MIT Sloan School of Management, who uncovered this behavior through a study investigating millions of U.S. car loans. This research reflects much of Palmer’s work: based on solid data while highlighting new perspectives on personal finance management, even in familiar areas.
“I study how households make financial decisions,” Palmer explains. “This includes both the decision-making processes of households and the external influences impacting these decisions. It encompasses a broad array of topics.”
Indeed, it does. Palmer, often in collaboration with co-authors, has also found that individuals prefer to make monthly payments in increments of $100, which can lead them to accept less favorable financing terms. Additionally, since household finance also covers housing issues, Palmer co-authored a prominent study revealing that individuals are significantly more likely to utilize housing vouchers and relocate to different neighborhoods when they receive assistance from a “navigator” during their move.
However, he does not solely focus on behavioral anomalies: Another of Palmer’s studies discovered that the Federal Reserve’s quantitative easing measures following the 2008 financial crisis enabled financially stressed individuals to refinance their mortgages, primarily benefiting those who had originally made down payments of 20% or more.
Overall, Palmer investigates large-scale economic situations where individuals experience financial strain, as well as consumer behaviors, particularly related to credit.
“To assess someone’s ability to make a monthly payment, you need to consider their labor market conditions, future expectations, and other factors,” Palmer remarks. “Credit markets are interconnected with nearly every aspect that one might care about. Part of my aim in highlighting consumer credit markets is their significant impact on various human outcomes.”
Palmer achieved tenure at MIT last year, recognizing his contributions in both research and teaching.
Useful intuition
Growing up in the Boston area, Palmer enjoyed math during his schooling, always fascinated by how individuals made financial decisions, particularly concerning real estate. As an undergraduate at Brigham Young University, he soon realized his desire to apply his mathematical abilities to analyze everyday occurrences.
“I appreciate how intuition can guide problem-solving, alongside the observatory aspect of being attuned to the world around me,” says Palmer.
As a student, however, he broadened his focus rather than narrowing it.
“I quickly recognized in college that I wanted to pursue dual majors in economics and mathematics,” Palmer explains. “That became my pathway towards obtaining a PhD.”
After graduating from BYU, Palmer entered MIT’s doctoral program in 2008. Alongside his coursework, he began working as a research assistant on a study examining rent control with professors David Autor—his future advisor—and Parag Pathak. This research eventually produced several high-profile papers. While rent control relates to household finance, the specific subdiscipline of household finance wasn’t well established at that time.
However, it soon would be. Palmer’s graduate journey coincided with the subprime-lending collapse that contributed to the 2008 financial crisis, leading to increased focus on these subjects in academic research. Suddenly, the issues he had been contemplating became pressing topics for academic inquiry.
“Mortgages and household finance became pivotal subjects overnight,” recalls Palmer. “This shift gave me the opportunity to write a dissertation on how low-income households make mortgage decisions. There was a clear demand for that area of study.”
Following the completion of his PhD, Palmer joined the faculty at the University of California, Berkeley, at the Haas School of Business, before returning to MIT in 2017.
“Household finance is a small field, so to make a meaningful impact, you have to link it with other disciplines,” Palmer adds. “For me, that could be macroeconomics, labor economics, corporate finance, or banking. This interdisciplinary exposure is what makes MIT an exceptional environment.”
Keeping a list of questions at hand
Given his extensive research interests, Palmer must remain agile in selecting topics for in-depth study. This involves seeking robust data related to household finance and consumer credit, structuring his research around pertinent questions.
“A good microeconomist is always in pursuit of new inquiries,” Palmer notes.
“I’ve always considered myself question-driven,” he adds. “I maintain a list of questions in mind so that if someone presents an intriguing data set, I can offer ideas on what we can investigate.”
One notable investigation into auto loans emerged when a co-author approached Palmer, expressing that he had identified an interesting data set and was seeking direction on its potential use. One ongoing question was: How thoroughly do people search for the best car prices and loan terms?
As a graduate student, Palmer recalls, “I remember MIT professor Glenn Ellison once stating that search is a particularly rich area for research. Consumers face complicated decisions, and companies often make comparison shopping challenging. Surprisingly, there hadn’t been much research on search behavior in household finance.”
Thus, Palmer and his team built the auto loan study around this issue. Their work analyzes the geographic distribution of millions of buyers, the number of lenders available within a 20-minute drive, and the extent to which consumers seek optimal deals. The study encompasses credit scores, vehicle prices, and loan terms, providing a comprehensive examination of the interactions between credit and vehicle purchases.
Best behavior
Some of Palmer’s research takes the form of experimental studies. An example is the paper he co-authored regarding factors that aid individuals in relocating, conducted in Seattle, where the research team collaborated with local policymakers to design an experiment.
In this Seattle study, the percentage of individuals utilizing housing vouchers to transition to new neighborhoods increased dramatically from 15% to 53% when they were provided with slightly more information, resources, and, notably, a “navigator” to assist with logistical details.
Examining how individuals manage their finances yields numerous insights related to behavioral economics, a subfield focused on the irrationalities—or lack thereof—in financial decision-making. Palmer believes such insights are crucial while emphasizing that he is not primarily focused on identifying irrationality. Instead, he consistently seeks to link behavioral studies to significant economic and policy issues: how we borrow, what we can afford, and how we respond to fiscal challenges.
“A study of behavior becomes compelling when it is tightly connected to public policy, instantly meeting the relevance criteria,” Palmer asserts. “I aim to produce work that resonates with a broad academic community and has meaningful impact on the wider world.”
