Sensitivity to Market Incentives: The Case of Policy Loans

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Abstract
The standard neoclassical theory is rejected as an explanation for the observed reluctance of most holders of whole life insurance to borrow against the cash-value of their policies at favorable rates of interest. Even when the neoclassical theory is augmented with transactions costs and short awareness lags, several empirical tests using survey and time series data reject the standard theory in favor of an explanation invoking self-imposed rules against borrowing or the "debt ethic." This evidence lends support to the psychology-based theories of Thaler and Shefrin (1981).

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