Shakespeare famously warned in Hamlet: “Neither a borrower nor a lender be.” It’s fitting that the bard - who died a very wealthy man - is quoted in a new research paper that looks at the hidden psychological strings attached to borrowed money that can strain relationships.
Perhaps he knew a thing or two about money and emotions.
Imagine you loaned money to a friend who said they were in need and shortly thereafter saw them post on social media about attending a Taylor Swift concert. How would that make you feel? Would you be upset seeing them spend lavishly instead of frugally? Would you feel that you were owed a say in how they spent their money? Well, you’re not alone.
This dynamic plays out for corporate loans as well. A perfect example would be the taxpayer-funded bailout of Air Canada in 2021. Finance Minister Chrystia Freeland noted, after hearing about millions of dollars in bonuses given to Air Canada executives after the company received a multibillion-dollar loan package, that the bailout gave Canadians a voice in the decisions taken by the company. Public reaction forced senior executives to give back the bonus money.
One of the inspirations for the research was the U.S. taxpayer outrage around the 2008 bailout of financial services giant AIG. When it was revealed that the company hosted a lavish golf retreat which included around US$23,000 in spa treatments after receiving an initial US$85-billion bailout, the public backlash was severe. Taxpayers also believed any bailout should come with strings attached.
“If lenders see strings, then they are inclined to think it’s okay to hold on to and even pull on those strings through the concept of deserved oversight,” says lead author Ashley Angulo, assistant professor of marketing at The University of Oregon.
“Deserved oversight” is the key driver of lender anger - this is the lenders’ belief that they deserve control and say over how the borrowed money is spent. Lenders feel more ownership over the funds than borrowers believe they should have and it is this mismatch in expectations that fuels conflict.
The research found that lenders have much stronger negative emotional reactions, especially anger, when borrowers spend money lent to them on hedonic or indulgent purchases as opposed to utilitarian or necessary ones. This applies in the context of friends lending money to other friends, but also to loans in a more formal context, such as a government bailout.
“Feeling like you own something shapes how you treat it, how you allow others to treat it, and importantly kind of distorts your thinking about how valuable the item you own is. We know that feelings of possession are unique to lending (since lenders anticipate getting that money back), so it’s because they still feel the attachment to this money that they see strings tethering themselves to the borrower,” Dr. Angulo said.
So what can we learn from this research? First, be very cautious about lending money to friends and family. Recognize that you will likely feel entitled to have a say in how they spend the money, which can damage the relationship if you do not approve of that spending. Set clear expectations upfront.
“Definitely talk with your friend about how they will spend the loan prior to agreeing to loan to them. If you think you can remain impartial, our data suggests that you won’t be able to, so maybe ask yourself upfront if you would be willing to let the borrower spend the funds on something hedonic,” Dr. Angulo said.
If you are the borrower, be sensitive that your friend or family member still feels psychological ownership over the funds. Avoid extravagant purchases until you’ve repaid the loan. Communicate how you are using the money.
As our society becomes more cashless, one key aspect that can alter the psychological dynamics of lending is the salience of money. We are more attached to physical cash, while electronic money is more abstract. Dr. Angulo suggests that the decreased sense of ownership when lending electronic cash might ease any anger felt when the borrower spends in a way you feel is lavish. But on the other hand, while digital platforms that facilitate casual lending between friends reduce the friction of lending, they also create a persistent digital record which could lead to friction in your relationship because it’s less likely to be forgotten.
The road to financial hell, it seems, is paved with good intentions - and hedonic purchases. Borrowers and lenders, beware.
Preet Banerjee is a consultant to the wealth management industry with a focus on commercial applications of behavioural finance research.