Researchers partnered with a large payday lender in Indiana to better understand consumers’ decision-making about payday loans

The research team implemented a survey evaluation to measure payday borrowers’ self-control for making rational long-term financial decisions and their self-awareness about their own self-control. The survey ran at 41 of the lender’s stores in Indiana from and had over 1,200 respondents included in data analysis.

Immediately before or after taking out a payday loan, borrowers participating in the study took a survey questionnaire offering choices between three rewards they would potentially receive twelve weeks later:

Researchers then used these responses to consider the implications of three commonly proposed payday lending regulations on consumer welfare

• Incentive for being debt-free: individuals would receive a US$ 100 cash payment if they did not take out any more loans for eight weeks
• Money for Sure: individuals would receive a “Money For Sure” reward, a cash payment regardless of their future behavior. Borrowers were asked to repeatedly choose between the US$ 100 debt-free incentive option and different amounts of “Money For Sure” (from what researchers call a “multiple payday loans with no credit check in Cuyahoga Falls price list”), taking into account their estimated probability of taking out another loan in the next eight weeks.
• Flip a Coin: This group was offered a 50 percent chance of winning $100 or nothing. Similar to the Money for Sure option, respondents went through a series of adaptive questions beginning with a tradeoff between flipping a coin to receive US$ 100 and receiving US$ 0 for sure. This helped researchers measure individuals’ risk aversion.

After the survey was complete, the iPad informed participants of whether they had been selected for one of types of rewards or received nothing (the comparison group). The probabilities of receiving the debt-free incentive, one randomly chosen value of their Money for Sure responses, or nothing were 44 percent, 2 percent, and 54 percent, respectively. Participants also received a reminder of the reward via email four weeks after the survey.

Researchers combined the survey data with administrative data from the lender covering individuals’ income, an internal credit score on a scale from 0-1000, pay cycle length, loan length, and loan amount

The evaluation revealed that the average borrower almost fully anticipates repeat borrowing. Among the people who did not receive any rewards (the comparison group), 70 percent said they would borrow again. When comparing with administrative data, 74 percent of the people did borrow, confirming that on average people can anticipate their likelihood of repeat borrowing.

However, researchers found this is not true among the most inexperienced borrowers, those who had taken out three or fewer loans from the lender in the six months prior to the intervention. On average, these borrowers underestimate their future borrowing probability by 20 percentage points.

People who received the incentive were less likely to predict correctly their probability of taking out a payday loan in the future. The average borrower predicted that the US$100 debt-free incentive would reduce the probability of taking out another loan within the next eight weeks to 50 percent. In reality, however, those offered the debt-free incentive took out another loan 70 percent of the time. This suggests that experience under normal conditions can help borrowers predict their behavior under normal conditions, but it does not help them predict their behavior under unfamiliar conditions.

On average, borrowers value the no-borrowing incentive 30 percent more than they would if had perfect self-control or if they are risk-neutral, suggesting people are present-focused and aware of this bias. Qualitative data also suggests that people focus too much on the present when taking payday loans. Fifty-four percent of the respondents said they “would very much” want to give themselves extra motivation to avoid payday loans in the future, and only 10 percent said they didn’t want extra motivation.