Psychology and Loans: The Strange Reasons Why You Make Bad Decisions

Watch any commercial television broadcast, and it's pretty clear that marketers believe that both sex and greed can sell nearly any product. You can hardly flip a channel without seeing an attractive woman convincing you to drink this beverage or drive that car or use a particular auction website or coupon code in order to save hundreds!!

But most of us think that we don't make our choices as to which beer to drink, what car to drive, or even where to score a bargain simply based on the advertisements that are clearly biased sources. We're much more rational than that.

And, even if we do end up drinking a brand of alcohol because we love a particular ad campaign and the beautiful eye candy the marketers are using to hawk it, what's the harm? After all, purchasing inexpensive products based on an emotional reaction is hardly going to hurt your bottom line. It's not as though human beings make big decisions — like whether or not to take out a personal loan — based on such emotional and irrational factors.

Unfortunately, it turns out that we do.

No matter how much we all pride ourselves on our rational decision-making processes, we are all susceptible to the seductive pull of non-informational marketing techniques, even when the financial stakes are relatively high, as when you apply for a loan. Though traditional economists would argue that the only deciding factor for a loan should be the overall cost vs. overall benefit, behavioral economist Sendhil Mullainathan found in a 2003 study that our decision process is much murkier.

A Loan Experiment in South Africa

Mullainathan's study, which he co-authored with four other researchers, set out to determine if the sorts of marketing ploys that advertisers have been intuitively using for years actually do affect a consumer's decisions and habits. For the experiment, the authors partnered with a bank in South Africa that was hoping to increase loans. This lender was a competitor in the "cash loan" market in South Africa, and it offered high-interest, short-term loans with fixed repayment schedules to members of the working poor population.

In this experiment, the lender sent out letters to over 50,000 previous borrowers, informing them that they were eligible for a special interest rate on a new loan. However, the interest rate offered to the borrower was randomized so that some letters offered low rates and some offered high rates. (Hence the term "special" rather than "low" in the letter.)

In addition, each letter also included various other randomized aspects: photos of bank employees varying by gender and race; an offer of a chance to win a cell phone in a lottery by coming into the branch; different tables, some of which were simple, and some of which were complex, that explained the loan options; and varying deadlines for taking advantage of the loan. Because of the large sample size and the randomization of the offers/letter characteristics, Mullainathan and his co-authors were able to scientifically determine which factors were most likely to appeal to potential borrowers.

Unfortunately, it seemed as though the borrowers were motivated by much more than just dollars and cents. As Mullainathan stated in a 2006 article in Harvard Magazine:

"What we found stunned me. We found that any one of these things had an effect equal to one to five percentage points of interest! A woman's photo instead of a man's increased demand among men by as much as dropping the interest rate five points! These things are not small. And this is very much an economic problem. We are talking about big loans here; customers would end up with monthly loan payments of around 10 percent of their annual income. You'd think that if you really needed the money enough to pay this interest rate, you're not going to be affected by a photo. The photo, cell phone lottery, simple or complicated table, and deadline all had effects on loan applications comparable to interest."

Considering the fact that these loans were offering interest rates as high as 11.75% per month, it's clear that these borrowers were thinking with something other than their brains — which seems to make no sense at all.

We're All Vulnerable to Sexy Marketing

You may be thinking that this particular study doesn't have anything to do with you and your brain processes. After all, the 50,000+ borrowers from the study come from a very different culture and society, and their socioeconomic background would seem to indicate a lower likelihood of higher education.

However, there have been multiple studies over the years examining the effect of attractive women on men's basic cognitive function. The findings have been both surprising and completely expected — interacting with an attractive woman temporarily makes it more difficult for men to think clearly. (The studies have found that women also lose some cognitive function when they find a man particularly attractive. But the effect was both more pronounced in men and more likely to occur even if the male participant was only somewhat attracted to the woman.)

This is hardly news for anyone who has lost the ability to speak in front of the object of their affection, but it doesn't seem to have anything to do with our susceptibility to marketing.

That's why a 2012 Dutch study adds such an important context to the fact that male South African borrowers were more likely to take a loan after seeing a picture of a female banker. Apparently, even the anticipation of interacting with a woman — who the participants in the Dutch study did not even see face-to-face — was enough to impair cognitive ability. Not only did the South African bank get to take advantage of the cognitive impairment brought about by beauty, it also impaired borrowers' decision-making when they thought about the possibility of interacting with the woman whose photo adorned their offer letter.

Emotion Is an Excellent Motivator

In addition to the photograph, the other big spur for South African borrowers was being given a tight deadline for taking advantage of the special loan rate and being offered a chance to win a free cell phone.

Theoretically, neither of those offers should have positively affected loan rates. Traditional economists would argue that shorter deadlines should result in fewer loans, since it gives customers less time to mull over their options and decide to go for it. But that runs absolutely counter to what every marketer from Groupon to Amazon has proven to be true — people are more likely to buy (or sign on the dotted line) if they don't have a chance to rethink their first impulse. Our first decision is generally based upon gut or emotion, whereas our second thought is when we realize the downsides.

And as for the cell phone giveaway, that simply plays into both a sense of greed — "I can get something for nothing!" — and the fact that most people overestimate their chances of winning any kind of lottery.

The rational part of the brain can hardly keep up with it all.

Being a Responsible Consumer

I was taught as a young girl to never, ever, ever give money to anyone canvassing door-to-door, no matter who they claimed to represent. While I do feel a little tenderhearted about charitable organizations and cute kids selling cookies, I find it very easy to turn away solicitors who are offering to help repair roof damage after a hail storm or get me set up with a security system on my house. And that's because I know that these solicitors are not knocking on my door in order to help me. They're looking out for themselves.

I bring this up because we often seem to forget the motivation behind letters offering "special" interest rates and emails providing us with one-day-only sale prices. If we regard anything coming unsolicited into our homes as untrustworthy, we won't even have the chance to be influenced by attractive photographs, cell phone lotteries, time deadlines, or special rates. That means you'll look into taking a loan when and only when you're ready for one.

Just be careful if the loan officer at the bank happens to be an attractive woman.

Average: 5 (1 vote)
Your rating: None

Disclaimer: The links and mentions on this site may be affiliate links. But they do not affect the actual opinions and recommendations of the authors.

Wise Bread is a participant in the Amazon Services LLC Associates Program, an affiliate advertising program designed to provide a means for sites to earn advertising fees by advertising and linking to

Guest's picture

The group of people they were marketing to were already poor financial decision-makers, so I think it says more about what influences people who are already inclined to make bad decisions than what would influence people who generally make good financial decisions.

Guest's picture

Great post! It's really interesting to find out how gullible we all really are when it comes to sexy marketing, pretty crazy.

Emily Guy Birken's picture

@Jenny, you make an excellent point. The sample group was already self-selected as individuals willing to take on cash-advance loans. However, it does appear that our decision-making processes can be affected by weird things. I personally suspect that good financial decision makers simply do not allow themselves to get into the position where their judgment will be swayed--that is, by treating solicitations as basically untrustworthy. I do remember, however, being worried about possibly becoming a mark when a devastatingly handsome car salesman was making his pitch to my all-female (and good with money) family. We drove off the lot with two new cars--but we did refuse the undercoating, no matter how much Mr. Handsome smiled at us.

Guest's picture

I love dealing with handsome salesmen. They're always so sure of their charm that they're much easier to manipulate back with the right amount of flattery! :P

Not sure it'll work as well when I'm older, but if it's mostly about their vanity, it should!

Guest's picture

What a great reminder that advertising affects us. Our environment can truly affect us in so many ways. Honestly, I think the only way we can overcome that is to seek the Lord. We're self-seeking and need to put off the desires of this world for God. I'm certainly not perfect, I have much work to do, but it's important to know our limitations.

Guest's picture

This is so thought provoking and so true. Marketing is a powerful influencer on our purchases. Just think about all those people driving BMW's to get from point A to point B when the bus or train or any cheap car can do the same. We think we are being rational with our purchases but they got us before our mind could even process the decision

Guest's picture

What an interesting experiment, I've never heard of that before. Its pretty clear that there are a number of factors that can weight on us when it comes to making decisions, especially related to finances. For us all there can be a few that remain (mostly) true and then theres factors that some will fall to that others don. Very interesting, you've made me think of this in a different way.