Making Sense of Soft Information: Interpretation Bias and Loan Quality

84 Pages Posted: 24 Mar 2017 Last revised: 11 Sep 2019

See all articles by Dennis Campbell

Dennis Campbell

Harvard University - Accounting & Control Unit

Maria Loumioti

The University of Texas at Dallas

Regina Wittenberg Moerman

University of Southern California

Date Written: March 1, 2017

Abstract

We explore whether behavioral biases impede the effective processing and interpretation of soft information in private lending. Taking advantage of the internal reporting system of a large federal credit union, we delineate three important biases likely to affect the lending process: (1) limited attention (or distraction), (2) task-specific human capital, and (3) common identity. Specifically, we find that using soft information in lending decisions leads to worse loan quality when loan officers are busy or before weekends and around national holidays, when loan officers have earlier sales experience, and when both the officers and borrowers are men. Overall, we provide novel evidence of non-agency-related costs in the use of soft information in lending decisions.

Keywords: Soft information, credit outcomes, cognitive constraints, interpretation and processing bias

JEL Classification: D03, D12, D19, G21

Suggested Citation

Campbell, Dennis and Loumioti, Maria and Wittenberg Moerman, Regina, Making Sense of Soft Information: Interpretation Bias and Loan Quality (March 1, 2017). 8th Miami Behavioral Finance Conference 2017; Harvard Business School Accounting & Management Unit Working Paper No. 18-110; Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2939881 or http://dx.doi.org/10.2139/ssrn.2939881

Dennis Campbell

Harvard University - Accounting & Control Unit ( email )

Soldiers Field
Boston, MA 02163
United States

Maria Loumioti (Contact Author)

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

Regina Wittenberg Moerman

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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