Statistical Significance is Not the Same as Economic Significance
By David Henderson
They [Hong Ru and Antoinette Schoar] find that less-educated households were offered higher late fees, over-limit fees, and default penalty rates, as well as more upfront inducements, such as low introductory APRs, cash back, and waivers of annual fees. In contrast, more highly educated households were offered cards with front-loaded features such as stable regular purchasing APRs and low late fees and over-limit fees.
This is from Deborah Kreuze,”Do Credit Card Companies Screen for Behavioral Biases?“, The NBER Digest, September 2016.
The whole study is here (although it is gated).
The authors’ answer to the title question is yes.
It makes sense. If people pay less attention to complex terms offered by credit card companies, or any other companies, it is not surprising that credit card companies want to take advantage of this. However, there’s one big offsetting factor. Even though credit card issuers want to take advantage of the gullible, they are competing to take advantage. So whereas a monopoly credit card issuer might be able to make hundreds of dollars more annually on gullible credit-card holders, firms competing with each other would probably not be able to. Why? As competitors attempt to take advantage of the gullible, competition drives margins down. How high or low? It’s an empirical question.
Unfortunately, the authors of the study don’t answer that empirical question. In their various tables of results in the appendix, they focus solely on statistical significance. But how economically significant are the results? Fortunately, although the authors of the study don’t answer that, the NBER writer who wrote up the results, Deborah Kreuze, does.
She doesn’t answer it directly in her text, but she inserts a figure that cannot be found in the original 58-page NBER study. The source of the figure is the authors’ calculations, calculations that are not apparent in the study. As expected, the biggest gap in late fees is the gap between those who did not graduate from high school and those who are post-college graduates. Similarly with the “over-limit fee.”
And what are the gaps?
Drum roll please.
. The gap in late fees between those who did not graduate from high school and post-college graduates was (from eye-balling the figure): 50 cents. Not 50 dollars. 50 cents.
. The gap in over-limit fees between those who did not graduate from high school and post-college graduates was (from eye-balling the figure): $1.60.
Statistical significance does not equal economic significance.