Pittsburgh, U.S.A. – As an old proverb goes, “before borrowing money from a friend, decide which you need most.”

New research from Carnegie Mellon University’s George Loewenstein and the University of Vienna’s Linda Dezso provides evidence of the pitfalls of making or receiving personal loans. Published in the Journal of Economic Psychology, the study is the first to systematically investigate the terms and consequences of loans between peers, such as friends, siblings and coworkers, and shows how self-serving bias behavior affects future relationships.

“This research fits with a wide range of earlier research showing the pernicious effects of self-serving conceptions of fairness,” said Loewenstein, the Herbert A. Simon University Professor of Psychology and Economics at CMU’s Dietrich College of Humanities and Social Sciences. “It provides further evidence that people’s tendency to confuse what is in their own interest with what is fair is a major source of disagreements between people.”

For the study, 971 individuals completed a detailed survey on the most recent personal loans they had made and received within the past five years. Each participant completed a lending and borrowing section of the survey and answered questions about the characteristics of the loans — size, purpose, amount repaid, presence of interest and existence of a formal contract — and the relationship and history between the borrower and lender.

Two main findings emerged from the study. First, the researchers found that borrowers are subject to a wide range of self-serving biases when it comes to loans. For example, borrowers are more likely to believe that the loan was initiated by the lender, that the loan had been paid off as agreed upon, and to report that a loan that they were delinquent in repaying was really more of a gift than a loan. Different recollections of the terms of the loan, and different perceptions of the degree to which the loan has been repaid, plant the seeds of misunderstanding between lender and borrower.

Second, although most of the loans reported by the people they surveyed did not result in misunderstandings between the parties, delinquent loans — loans that had not been paid off and were overdue — resulted in wide-ranging negative repercussions. Again, self-serving bias came into play; borrowers predicted that they would eventually pay off such loans, while lenders predicted they would never be paid. And lenders of delinquent loans reported lower feelings of closeness to, and trust in, the borrowers, and also reported that delinquent borrowers were avoiding encounters with them. Borrowers, for their part, seemed to be blithely unaware of the negative feelings aroused in lenders, and, on their own part, did not report any similar change in feelings toward the lenders.

“This research provides empirical backing for the many adages cautioning against lending to a friend: lending can be hazardous to a relationship,” said Dezso, a pre-doctoral candidate in economic psychology. “That doesn’t mean you should never lend money to a friend — personal loans can be lifesavers in many situations in which commercial loans aren’t feasible; but the research does strongly support the idea that it is a big mistake to borrow money from, or loan money to, a friend, if both parties aren’t confident that the loan will be paid off in a timely fashion.”

But, Dezso adds, “Unfortunately our findings suggest that such confidence, even when it exists, is often misplaced.”

The survey was funded out of Loewenstein’s research funds provided by Carnegie Mellon University.

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New York, U.S.A. – Carnegie Mellon, Hult International Business School and NYU Abu Dhabi were honored for their commitment to eradicating poverty at the Hult Global Case Challenge in New York City, hosted by Hult International Business and the Clinton Global Initiative.

The three winning teams beat thousands of students from the world’s best business schools for a US$1 millioncash grant and
were honored by President Bill Clinton.

Started three years ago by Hult graduate Ahmad Ashkar, the Hult Global Case Challenge is the largest and most respected initiative of its kind. Harnessing the power of crowd sourcing, the Hult Global Case Challenge attracted students from 350 colleges and universities to provide solutions to the real challenges facing three NGOs. These are Habitat for Humanity, which builds affordable housing; SolarAid, which brings renewable energy to impoverished communities; and One Laptop Per Child, which provides low-cost computers to children.

A panel of high-profile judges including: Nobel Peace Prize winner Muhammad Yunus, former New York Governor Mario Cuomo, Unilever Chairman Michael Treschow, social entrepreneur Darell Hammond, and the CEOs of the three NGOs, selected the winners in education, housing and energy.

Education               

Winner: Carnegie Mellon

To help One Laptop Per Child (OLPC) put 10 million laptops in the hands of children worldwide in the nextfive years, the Carnegie
Mellon team presented an innovative approach to ensure streamlined laptopdeployment and to create a global brand for the
NGO ’ s open-source software.

“The Hult Global Case Challenge has provided us with many ideas to address the challenge of scaling OLPC to enable learning for the world’s poorest children,” said Rodrigo Arboleda, Chairman and CEO of the One Laptop per Child Association. “We appreciate the creativity, passion and effort of all the student teams around the world who participated in the competition.”

Housing

Winner: Hult International Business School

Habitat for Humanity has a mission to provide homes for 50 million people within the next 10 years.
Hult ’s winning solution focuses on harnessing the intelligence of those at the bottom of the pyramid andequipping them to
solve their own problems.

“Hult’s Global Case Challenge is good news for everyone involved,” said Jonathan Reckford, CEO of Habitat for Humanity. “Students have the opportunity to solve real-world challenges, and organizations like Habitat benefit — not only from the prize money used to implement the winning proposal, but also from the ideas that emerge from crowdsourcing and the relationships that we develop with tomorrow’s business leaders.”

Energy

Winner: NYU Abu Dhabi

Many Africans still rely on kerosene lamps. NYU Abu Dhabi ’ s solution focuses on creating a network ofentrepreneurs and
technicians who will sell and fix solar lamps in a sustainable way.

Speaking in support of the winning team’s solution, SolarAid CEO Steve Andrews said: “Our goal is to eradicate the kerosene lamp from Africa by the end of this decade. That’s simply a huge challenge, which will only be possible with massive innovation. Having the top students from around the world competing to come up with great ideas for how we will do this is an extraordinary boost. It’s already changing the way we think and work.”

Ahmad Ashkar, the founder and CEO of the Hult Global Case Challenge, said: “This initiative aims to revolutionize how we think about the world’s most pressing social challenges. With US$1 million in seed capital, students from all over the world have a chance to establish social enterprises that achieve real results.”

Congratulating the winning teams, Hult President Dr Stephen Hodges added: “The Hult Global Case Challenge is an important part of Hult’s push to encourage social entrepreneurship among talented students, whichever country they come from. Through this visionary kind of crowd sourcing we’re giving NGOs access to a wealth of new ideas and perspectives that help them grow stronger.”

Image Courtesy of  Jose Gil / Shutterstock.com

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