Law and Economics Workshop hosts Dr. Ayala Arad, Faculty of Business Administration, Tel Aviv University.

Abstract: 

Could introducing a tiny interest rate on positive balances of checking accounts

affect investment decisions? We suggest, counter-intuitively, that it might decrease allocations

to checking accounts while increasing riskless investments with higher returns.

This violation of monotonicity is a potential outcome of a novel behavioral phenomenon

that we formalize and investigate experimentally in different environments. It posits

that even a small interest rate highlights or turns-on the safe gains dimension, bumping

up its decision weight while shrouding other considerations, such as liquidity. Consequently,

choices may shift from the most liquid option, the checking account, to safe

investments with superior returns.

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