Masaki Mori

Date of Award


Degree Type

Closed Dissertation

Degree Name

Doctor of Philosophy (PhD)


Real Estate

First Advisor

Julian Diaz III - Chair

Second Advisor

Alan J. Ziobrowski

Third Advisor

Paul Gallimore

Fourth Advisor

J. Andrew Hansz


Why Do Borrowers Choose Arms Over FRMS? : A Behavioral Investigation in the U.S. and Japan by Masaki Mori In the U.S., a considerable number of borrowers still choose adjustable rate mortgages (ARMs) over fixed rate mortgages (FRMs), even with historically low interest rates. During 2004-2005, when interest rates remained at 30-year lows, ARMs accounted for approximately one-third of all mortgage originations. Kahneman and Tversky's Prospect Theory’s reflection hypothesis suggested that people tend to be more risk-averse in positive decision situations, while they tend to be more risk-seeking when making negative choices. The first purpose of this study is to examine descriptive reasons for the popularity of ARMs in the U.S. People of different cultures often evaluate uncertain events in different ways. Hofstede developed a cultural dimension, uncertainty avoidance (UA), where UA is defined as the extent to which people feel threatened by uncertain situations. The second purpose of this study is to test the role of UA on the choice of mortgage products using data from two cultures (U.S. and Japan), potentially differing in attitude toward uncertain situations. Controlled experiments were conducted using 92 U.S. participants and 49 Japanese participants. Results of analysis supported Prospect Theory’s reflection hypothesis, suggesting that risk-averse people tend to become more risk-seeking when choosing a mortgage type, leaning more toward ARMs when people frame the mortgage choice problem as part of a loss situation. The results of the intercultural comparison portion of the study supported the research hypothesis that UA works as a moderating variable for Prospect Theory’s reflection hypothesis, suggesting that risk-averse people with lower UA scores more dramatically change from a risk-averse preference for a fixed-rate bond to a more risk-seeking preference for an adjustable-rate mortgage, than risk-averse people with higher UA scores do. Overall, results of this study suggested that borrowers behave differently depending on their propensity for current consumption, the level of UA, and how they frame the mortgage choice decision. This study contributes to existing mortgage choice literature by incorporating psychological and cultural traits to examine borrowers’ attitudes towards interest rate risk with regard to residential mortgages. The findings are of great importance globally for governments and lenders in creating and introducing new mortgage products in countries with diverse cultures.