Monday, July 1, 2013

The social pressure of overborrowing

The recent financial crisis has highlighted the sometimes very poor financial choices of households, in particular overborrowing. What leads people to borrow beyond their means or to take excessive risk of default or bankruptcy? Is it because of predatory lending with perverse incentives for loan underwriters? Plain stupidity of the borrowers? Or rational exuberance?

Dimitris Georgarakos Michael Haliassos and Giacomo Pasini look at Dutch data and find rather something that looks like social pressure. Indeed, they find that borrowing is heavier among those who consider themselves poorer than their peers. In other words, they are trying to keep up with the Jones in the sense that they want to display the same material wellbeing as their peers, on a borrowed dime. I do not know how much peer pressure there is in the Netherlands, but I can imagine a series of countries where such pressures would be important, where you need to fit in by having the right car or the right house, or by taking the right vacations. And it seems unavoidable that some people will overextend themselves in such an environment.


Anonymous said...

Hm. In other words, plain stupidity of the borrowers it is.

The World Around Me said...

Haha I can not help but agree with the comment above

Podoloski advani said...

This article is mind blowing I read it and enjoyed. I always find this type of article to learn and gather knowledge.

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Sachit Rajan said...

The extensive borrowing is really fatal There should be clear Financila Literacy Programmes headed by government with a panal of experts in each and every country.