Positive illusions and the temptation to borrow

Abstract

We provide an explanation of the low willingness to save that is observed in many poor countries. Our explanation is based on the hypothesis that people have an over-optimistic outlook. As discussed in the psychological literature, an illusionary positive view of the future may be a good thing. However, we show that it can lead individuals to accumulate unsustainable levels of debt. Using survey data from South Africa, we confirm that poor people are indeed overly optimistic, and also that optimism is positively and significantly related to debt accumulation.

Job Polarisation and Household Borrowing

“…At the same time, credit institutions might be wary of investing in labour-intensive sectors with a high degree of substitutable human capital. Changes in the employment structure can also affect household borrowing decisions, as there is evidence for job insecurity to affect consumption (Benito, 2006), and for individual expectations to affect borrowing behaviour in general, as Kløve and Mehlum (2018) find that over-optimistics income and wealth outlooks can lead individuals to accrue unsustainable levels of debt. In the context of job security and polarisation, other studies (Georgieff and Lepinteur, 2018) have shown that economy-wide changes in labour demand can have polarising effect over individual expectations on job stability.…”