Why It's So Dumb to Lend Money to a Friend

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"One of the very surprising things we observed was that unpaid loans created really bad feelings in lenders," Loewenstein said. "They were very upset about it and they believed that the borrowers were feeling very guilty, but the borrowers, maybe in part because they think they will eventually pay the loan off, were amazingly unconcerned about the unpaid loans. The borrowers tend to have a real blind spot for the misery and anger and disappointment of the lenders."

Most of these problems probably could have been avoided had the borrower and the lender sat down together and drawn up a written contract.

"There is almost universal failure to write out a contract stating the expectations" between the two friends, Loewenstein said.

"This is probably the central problem with personal loans because with no record, the self-serving bias can sort of prosper because there is no record of the terms of the loan or how much has been repaid.

"That's very much at the heart of the problems associated with personal loans," he added.

So what's lost in all of this? Not a lot of money. But quite likely, a valuable friendship.

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