Reckless Borrowing

February 6th, 2013 by Andrea Bennett

New research suggests this behavior may be less about irresponsibility, and more about staying afloat.

Brought to you by Liberty Mutual's
The Responsibility Project

A recent article from The New York Times challenges the conventional notion that the only explanations for reckless financial borrowing are irresponsibility and a society that encourages free spending, suggesting that this kind of “financial self-sabotage” could be the result of scarcity.

The article recounts the stories of various people living close to the edge of the poverty line, who were then pushed over by a major event – job loss, health problems, etc. – and begin borrowing recklessly at high interest rates that they never would have agreed to previously.

During hard times, the psychological burden of debt saps intellectual resources and reinforces seemingly cavalier behavior, says Eldar Shafir, a professor of psychology and public affairs at Princeton. The Times notes, “Millions of Americans have been keeping the lights on through hard times with borrowed money, running a kind of shell game to keep bill collectors away. The average debt for households earning $20,000 a year or less more than doubled…between 2001 and 2010.”

In fact, the old saying “poor people, poor ways” might not be a character judgment, according to poverty research, but simply the result of impoverished people making decisions that they likely know will hurt them in the long-term – all to keep cash flow going as long as possible. Last year, The New York Times reported on a paper published by a group of researchers from the University of Chicago Booth School of Business, which focused on a study in which participants competed in the game “Family Feud.” The “poor” team was given only 15 seconds per round of guesses, while the “rich” team was given one minute per round. While both teams could borrow time against later rounds, the “poor” team borrowed far more, shrinking their future “paychecks” while the “rich” were mostly able to avoid debt.

Another study, led by Kristen Seefeldt, a sociologist at the University of Michigan, followed a group of 39 single mothers in Detroit. The results showed that many of the women, who were juggling multiple debt forms, “were as sophisticated as any debt manager. One woman…was using more than a dozen credit cards to buy food and pay her mortgage, playing the cards against one another to lower rates.”

What have you observed (or experienced) during these tough economic times? Is a free-spending attitude without a view to the future irresponsible? Or is it unavoidable? Weigh in here.