Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors
37 Pages Posted: 10 Dec 2019 Last revised: 1 Oct 2021
Date Written: April 2, 2019
We study the investor behavior on a leading peer-to-business lending platform and identify a new investment mistake – a default shock bias. First, we ﬁnd that investors stop investing in new loans and cease from diversifying their portfolio after experiencing a loan default. The default shock significantly worsens the risk-return proﬁle of investors’ loan portfolios. The defaults investors experience are often not beyond what could have been expected based on the information that was provided by the platform ex-ante. Second, investment experience on the platform is related to better investment decisions in general, but does not reduce the default shock bias. These ﬁndings have important implications not only for the behavioral ﬁnance literature, but also more generally for new forms of Internet-based ﬁnance.
Keywords: Behavioral ﬁnance, Investment bias, Peer-to-business lending, Crowdlending, RAROC, Diversiﬁcation
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