As mentioned in a recent post, we mostly-hairless apes are genetically sucky actors when it comes to economics. In many ways, we display similar irrational behavior to our relatives the capuchin monkeys. Capuchins, like us, don’t want to give up something we already have, even for more than we would be willing to pay for the item ourselves (the endowment effect). We also share some other irrational biases with capuchins: reference dependence (preferring to gamble when the outcome is framed as a bonus versus a loss, even if the outcomes are the same), loss aversion (avoiding the feeling of loss, even if the outcome is the same), and the reflection effect (engaging in risky behavior to avoid loss). One area where capuchin monkeys differ from humans is with pricing effects – capuchins don’t give a shit if their bonbons come from Whole Foods or Safeway, they’ll just go for the better deal. Humans, on the other prehensile appendage, will often place more value on the pricier object, regardless of the arbitrariness of this pricing. Of course, this makes us humans more sophisticated. Maybe it’s another evolutionary adaptation: status seeking.
Those payday lender guys must be a pretty sophisticated bunch, because they figured out how truly irrational humans are when it comes to economics. Well, they also use a lot of dissembling and trickery and outright assholery to get their hands on (mostly) poor people’s money. So it’s nice to see that the Consumer Financial Protection Bureau is trying to rein them in. Despite interest rates that can top 300% and a system that’s designed to ensnare people in debt, the payday loan biz has its defenders (albeit generally people who make money from them, or the usual naïve anti-regulationists). Donald C. Lampe, a lawyer for a firm that advises payday lenders, says, “Just punishing payday lenders is not going to prevent Americans from needing short-term products.”
Yes, exactly – they shouldn’t just punish them. They should punish them by regulating them into oblivion and they should obviate the need for their services. Let’s face it, most people who get payday loans don’t have very good financial acumen. As noted above, evolution has programmed us to run around like drunken sailors (or brain-damaged capuchins) when it comes to money. So how do we overcome our fiscal lunacy? Education is a good way; why not have a required course in high school that teaches some basic principles of personal finance?
Victims of the payday loan scam have some culpability, but there is also a more systemic issue; most victims of payday lenders are hard working people who still aren’t making ends meet. And, yes, a better understanding of personal finances might help there, too. But so would giving people a decent wage to start with. Shouldn’t the wealthiest nation in the world provide a minimum wage that gives people a fighting chance?
What about people who, in spite of the above measures, still find themselves in desperate need of a short-term loan? Why not have an insurance system of sorts? This could be an emergency fund that everybody pays into that distributes short-term loans at reasonable rates when people can show that they truly have need.* The expectation is that these loans would be paid back, but for those that aren’t, it wouldn’t lock people into a spiral of unending debt. It could even come with some financial counseling to help people avoid it in the future. Ultimately, such a fund would redound to the economic well-being of us all – an investment to create a more productive populace less likely to fall into a spiral of debt.
When it comes to economics, we’re not perfectly rational actors. Companies like the predatory lenders take advantage of our weakness. We wouldn’t want lawyers and lobbyists in lieu of mechanics for the airlines; why do we let crooks, lawyers, and lobbyists continue with the payday loan scam? Let’s stop letting the predatory lenders make monkeys out of us all.
*Maybe this could be an extension of TANF.