Along Florida Boulevard in Baton Rouge, Louisiana, you can lose count of the storefronts offering payday loans. Two adjacent zip codes in this area — home to some 60,000 people, a fifth of whom live in poverty — support no fewer than 45 of these operations. That’s one for every 1,300 residents, more than ten times the national average.
As in so many similar American neighborhoods, a reliance on payday loans — small cash advances, often with compounding interest that can quickly trigger a cycle of debt — is both a cause and a symptom of ingrained poverty. When cash is tight and the next paycheck is days, if not weeks, away, a local payday lending shop can feel like the only option, particularly as traditional banks have retreated from low-income neighborhoods or adopted fee structures hardly, if at all, more manageable for the poor. Without access to short-term loans, payday borrowers told a recent Pew Charitable Trusts survey, they would sooner cut back on spending or even default on their bills before asking friends or family for assistance — an option as palatable to them as selling or pawning personal possessions.
These sentiments highlight a longstanding dilemma in economics and public policy-making: Why are shortsighted financial choices, like the decision to take a short-term high-interest loan, so prevalent in populations that can least afford to make them?
A big part of the answer lies in one’s social environment, argues a new paper published in the Proceedings of the National Academy of Sciences. It finds that people’s ability to turn to friends and neighbors during crises — that is, the extent to which individuals trust their local community — leads to better long-term financial choices. Stronger social bonds allow individuals to rely on their community to help ameliorate their financial needs, the authors argue, which means that public assistance programs that focus on whole neighborhoods, rather than their individual residents, must receive renewed attention.
“It all depends on how you think about decisions that pit the present against the future” says Jon Jachimowicz, a doctoral candidate at Columbia Business School and lead author of the study. “We found that trusting your social environment allows low-income individuals to even consider investing into the future.” In other words, stronger bonds with one’s community ease the anxiety that spurs many people to sacrifice tomorrow’s potential gains for today’s needs.
Jachimowicz co-wrote the paper with four colleagues: Salah Chafik, also of Columbia Business School, Elke Weber of Princeton, Jaideep Prabhu of the University of Cambridge, and Sabeth Munrat of BRAC, a Bangladesh-based international development organization. The authors based their conclusions on four studies, combining administrative data, surveys, and experiments in the lab and field in the United States and Bangladesh, respectively.
In one study, the researchers surveyed 5,721 people from across all 50 U.S. states to gauge how connected they felt to neighbors by asking them to agree or disagree with a range of statements, including “I do a lot of good things in my neighborhood” and “There are advantages to living in my neighborhood.” Their responses were matched with historic data on payday loan usage by state. Controlling for other variables like income and employment, the authors found a strong correlation: lower community trust was related to a higher share of individuals heading to the payday lender.
In a second study, the authors graded 647 survey participants not only on how much they trusted their community but also on the degree to which they discounted the future — that is, their willingness to forgo smaller immediate gains in favor of larger payoffs down the line. Sure enough, stronger community trust enabled better long-term choices across income levels — with only the wealthiest respondents able to maintain a long-term financial focus in the absence of a strong sense of connection to their community.
This finding makes perfect sense, Jachimowicz says, because social bonds help us feel confident about our future no matter our relative wealth.
“Rich people and poor people approach life choices in different ways because they experience life differently,” he adds. A person accustomed to constant hardship is more likely to expect further hardship around the corner than someone who has led a more financially comfortable life. Of the two, the first would trust the world less and discount the future more. Take a hypothetical choice between $85 today or $100 in two weeks. If you’re poor, your past interactions with the world might leave you skeptical of future payoff promises, Jachimowicz explains. You might find yourself asking not only “can I afford not to take $85 right now?” but also “do I really believe I’m going to get $100 later?” As a result, individuals may opt for the cash upfront not because a financial emergency is immediately at hand, but because one looms constantly on the horizon — one their community may or may not be able to help them overcome.
While a broad faith in the world’s fairness could be challenging to instill, the researchers posited that trust in the immediate community may be more malleable. If people could learn to trust their neighbors to lend them a hand in a crisis, the researchers thought, perhaps they could move toward wiser, more forward-looking financial decisions.
This thinking gave rise to the third study, which directly observed the power of strengthened social trust at a community level. The authors partnered with BRAC and another organization, The Hunger Project, on a development program that helped poor rural residents in Bangladesh pull together in an effort to improve local governance. For two years, trained volunteers chosen from 61 union councils, the smallest administrative area in Bangladesh, worked to help their fellow villagers better articulate demands and press them with local administrations. When the program ended, the villagers shared their impressions in surveys and a decision-making experiment. Not only did they report significantly deeper community trust compared to a control group of 60 union councils that did not receive the intervention, but they also grew more willing to make better financial choices and forgo immediate payoffs.
On the whole, Jachimowicz says, “we know that programs that strengthen community trust have an impact on poverty — because we’ve actually measured it.”
The study adds a hopeful note to an otherwise bleak array of recent reports on trust as a social commodity. To name just one, a recent IMF analysis found that rising income inequality in the United States and Europe has decimated our trust in other people, with potentially dire consequences for everything from innovation to international trade. Indeed, according to public opinion polls, the share of Americans who trust their fellow citizens has plummeted over the past four decades, from about 50 percent in the 1970s to 33 percent today.
“Right now, most interventions, from welfare to food stamps, focus on the individual,” Jachimowicz says. “It’s an individualistic perspective on the world, which I think has to do with our way of life. But even in hyper-individualistic societies like America’s, a focus on the community is important.” Public assistance programs that take this approach — by adding new classes at local community centers, for instance, or creating better public spaces — might be due for a reassessment, one that the Trump administration has signaled it is unlikely to undertake. The administration’s preliminary 2018 federal budget proposal would eliminate the $3 billion Community Development Block Grant program.
Of course, aid to disadvantaged individuals is not misdirected. On the contrary, there is little question, for instance, that efforts to alert potential borrowers to the dangers of short-term high-interest loans, along with expanding access to lower-cost alternatives, have helped stave off many bankruptcies. In stressing the importance of developing trust within communities, the authors make an argument for examining the forest along with the trees.
Geospatial analyses have shown that payday lenders concentrate in urban neighborhoods with large populations of minorities, young people, and the unemployed — the very demographic groups most likely to use their services, according to surveys. While many jurisdictions have turned to financial regulations to stem predatory lending, Jachimowicz suggests that repairing the frayed social fabric of these communities is just as important. Sound financial decision-making can start with getting to know the neighbors.