Bank overdraft pricing and myopic consumers

- There has been a dramatic increase in the use of bank overdrafts in the last decade.
- I examine the link between bank overdraft prices and consumer myopia.
- Myopia is higher in young, rich populations with a higher proportion of females.
- The findings suggest that banks target myopic consumers with expensive overdrafts.

In recent years, banks have routinely earned annual percentage rates of over 1,000 percent on overdraft services. Such returns are staggeringly high, especially in an arguably competitive industry; and consequently, consumer protection groups have been lobbying for increased oversight of bank overdraft fees (and similar fees). In the context of a model proposed by Gabaix and Laibson 2006, I find support for the argument that banks target myopic consumers - consumers who do not consider the add-on good when choosing the base product. Using demographic characteristics to proxy for the proportion of myopic consumers, I find results that are consistent with Gabaix and Laibson 2006 in the pricing of bank overdraft services.