Oversight of Borrowed Money Creates Animosity

Friends lending to friends, taxpayers bailing out businesses feel it’s still their money and have opinions on how it’s spent

The Census Bureau periodically asks consumers if they have hit up a friend or family member for cash in the past seven days. Though there is some variance from survey to survey, more than 25 million Americans typically say they have indeed recently borrowed from someone they know. 

Research published in the Journal of Consumer Psychology confirms that borrowing from friends can be a fraught endeavor due to a mismatch in expectations. University of Oregon’s Ashley N. Angulo, UCLA Anderson’s Noah J. Goldstein and Harvard’s Michael I. Norton make a case that friends who lend do so with a big implicit string attached: They feel the money is still theirs, and thus believe they should have control over how it is used.

And lenders with an embedded sense of ownership of the money aren’t amused when friends  buy something nonessential rather than cover a necessary expense with the money.

This dynamic extends beyond interpersonal relationships. Angulo, Goldstein and Norton ran related experiments that centered U.S. taxpayers as lenders and businesses in need of a bailout as borrowers. Here too, lenders had stronger opinions about how borrowers used the money.

Whose Money Is It?

This research explicitly focused on actual lending, not outright gifts or situations where Party A pays for Party B’s expenses. Prior research has established that lent money is considered to be a “shared possession.” The borrower receives the money with the explicit expectation by both parties it will be repaid to the lender.

The researchers posit the implicit temporary nature of the transfer compels lenders to feel a sense of “deserved oversight.” Lenders believe that since, at the end of the day, it is their money, they should have a say in how the borrower uses it.

An initial experiment among the six studies conducted by the researchers established that money borrowed by a friend and spent on a need (a book for a class) was indeed viewed more positively by participants in the role of lender than when lenders were told the borrower used the money on an indulgence (a video game). 

Moreover, on a scale of 1-9, participants/lenders registered a higher level of anger when told the purchase was an indulgence, compared with a utilitarian need. There was no difference in anger levels for hedonic versus utilitarian purchases when the money exchanged was framed as being a gift or something Party A agreed to pay for outright for Party B. 

A related experiment tossed in the variable that the borrowed money had been repaid. Some hard feelings still seem to linger for nonessential usage. Lenders registered a higher anger score for repaid loans that were spent on an indulgent purchase, compared with repaid loans used for a need. 

To isolate the potential dynamic of “deserved oversight” the researchers ran an experiment in which the target purchase was the same — a used car. Some participants were told their friend was considering a utilitarian sedan that was dependable and fuel-efficient. Others were told the friend was eyeing a more “fun” sports coupe that wasn’t particularly dependable and not particularly good on gas mileage. Participants were asked how much control/say the lender should have about the car purchase on a scale of 1 to 11. 

When participants/lenders were told the borrower wanted to buy the more fun, flashier sports car, lenders felt they deserved more oversight compared with borrowers who would use the money for the “utilitarian” car.

Way Up In Your Business

A companion experiment also makes a case that this sense of control extends beyond actual borrowed money; participants/lenders also wanted oversight of other money the borrower took in (a surprise work bonus) after receiving the loan. 

The oversight dynamic persisted when the frame went macro. Nearly 250 participants read about a small business in financial trouble that received a government loan. Some participants were told that the business would use 30% of the funds to pay for a morale-boosting Las Vegas off-site that included golf and spa treatments. The other group of participants read about a company planning a more sober, utilitarian use of the money: a conference in Nebraska focused on business practices.

Anger was significantly higher toward the company that intended to use the money for Vegas team building. And lender participants wanted more oversight of that company.

This is not purely hypothetical. After insurer AIG received an $85 billion bailout in the midst of the 2008 financial crisis, word got out that it hosted a weeklong retreat for its executives that included high-end spa treatments. The researchers suggest their findings illuminate the “asymmetries” in perceived ownership of this bailout: Taxpayers were angry, yet AIG wasn’t remorseful, noting it intended to pay back the loan and thus didn’t see why there should be oversight of how it spent the money. A similar tension arose from 2020 COVID-19 bailouts that didn’t specify how the funds be used.

This research makes a case that regardless of the lender-borrower relationship, explicitly laying down expectations on use of the money might lessen the implicit disconnect about who really owns loaned money.