The Value of Personal Relationships in a Digital World
NO ONE WOULD ARGUE that online and mobile banking have transformed the financial services industry. Tech-savvy customers welcome online banking for its convenience, and banks view it as a way to increase efficiency. But despite the rapid growth of digital tools and solutions, personal relationships remain critical in the financial sector.
My research indicates that there are hidden costs to abandoning personalized banking relationships — and that personal relationships between borrowers and lenders can benefit both parties. In this article I will summarize my research and show a few important ways that personal ties shape financial intermediation.
Personal Relationships as Liabilities
In finance, personal relationships can have upsides and downsides. One potential downside relates to ‘escalation of commitment,’ or the tendency for individuals to contribute more to failing investments when they feel personally responsible for them. Researchers treat escalation as a ‘decision error’ because the decision to support struggling investments is driven by a sense of personal responsibility rather than by objective performance indicators.
Escalation can manifest itself in both monetary and non-monetary forms. Although UC Berkeley Professor Barry Staw first observed it in financial contributions to failing investments, scholars have also examined it in a variety of non-financial situations where actors continue to invest time, social capital and other non-monetary resources in poor-performing investments — including keeping rather than trading professional basketball players. In such cases, actors escalate by continuing to allocate time and effort to a person, product or project that presents signs of poor performance. Whether investments occur in the stock market or on the basketball court, they are subject to escalation tendencies.
Further, scholars have shown that actors who have personal relationships with a subject are less likely to cut ties, even when the relationship becomes problematic. For example, individuals are less likely to cut ties with exchange partners with whom they have personal ties,
