Rational Herding in Microloan Markets
Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders....
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| Format: | Article |
| Language: | en_US |
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Institute for Operations Research and the Management Sciences (INFORMS)
2013
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| Online Access: | http://hdl.handle.net/1721.1/77217 https://orcid.org/0000-0002-1635-3797 |
| _version_ | 1811078226898845696 |
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| author | Zhang, Juanjuan Liu, Peng |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Zhang, Juanjuan Liu, Peng |
| author_sort | Zhang, Juanjuan |
| collection | MIT |
| description | Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance. |
| first_indexed | 2024-09-23T10:56:06Z |
| format | Article |
| id | mit-1721.1/77217 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T10:56:06Z |
| publishDate | 2013 |
| publisher | Institute for Operations Research and the Management Sciences (INFORMS) |
| record_format | dspace |
| spelling | mit-1721.1/772172022-10-01T00:01:27Z Rational Herding in Microloan Markets Zhang, Juanjuan Liu, Peng Sloan School of Management Zhang, Juanjuan Zhang, Juanjuan Microloan markets allow individual borrowers to raise funding from multiple individual lenders. We use a unique panel data set that tracks the funding dynamics of borrower listings on Prosper.com, the largest microloan market in the United States. We find evidence of rational herding among lenders. Well-funded borrower listings tend to attract more funding after we control for unobserved listing heterogeneity and payoff externalities. Moreover, instead of passively mimicking their peers (irrational herding), lenders engage in active observational learning (rational herding); they infer the creditworthiness of borrowers by observing peer lending decisions and use publicly observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Similarly, favorable borrower characteristics (e.g., friend endorsements) weaken the herding effect, as lenders attribute herding to these observable merits. Follow-up analysis shows that rational herding beats irrational herding in predicting loan performance. 2013-02-27T18:49:48Z 2013-02-27T18:49:48Z 2012-01 2011-01 Article http://purl.org/eprint/type/JournalArticle 0025-1909 1526-5501 http://hdl.handle.net/1721.1/77217 Zhang, J., and P. Liu. “Rational Herding in Microloan Markets.” Management Science 58.5 (2012): 892–912. https://orcid.org/0000-0002-1635-3797 en_US http://dx.doi.org/10.1287/mnsc.1110.1459 Management Science Creative Commons Attribution-Noncommercial-Share Alike 3.0 http://creativecommons.org/licenses/by-nc-sa/3.0/ application/pdf Institute for Operations Research and the Management Sciences (INFORMS) Prof. Zhang via Alex Caracuzzo |
| spellingShingle | Zhang, Juanjuan Liu, Peng Rational Herding in Microloan Markets |
| title | Rational Herding in Microloan Markets |
| title_full | Rational Herding in Microloan Markets |
| title_fullStr | Rational Herding in Microloan Markets |
| title_full_unstemmed | Rational Herding in Microloan Markets |
| title_short | Rational Herding in Microloan Markets |
| title_sort | rational herding in microloan markets |
| url | http://hdl.handle.net/1721.1/77217 https://orcid.org/0000-0002-1635-3797 |
| work_keys_str_mv | AT zhangjuanjuan rationalherdinginmicroloanmarkets AT liupeng rationalherdinginmicroloanmarkets |