Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors

37 Pages Posted: 29 Oct 2019

See all articles by Gregor Dorfleitner

Gregor Dorfleitner

University of Regensburg - Department of Finance

Lars Hornuf

University of Bremen - Faculty of Business Studies and Economics; Max Planck Institute for Innovation and Competition; CESifo (Center for Economic Studies and Ifo Institute)

Martina Weber

University of Regensburg - Department of Finance

Date Written: April 2, 2019

Abstract

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

Suggested Citation

Dorfleitner, Gregor and Hornuf, Lars and Weber, Martina, Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors (April 2, 2019). CESifo Working Paper Series No. 7092; Max Planck Institute for Innovation & Competition Research Paper No. 18-11 . Available at SSRN: https://ssrn.com/abstract=3186093 or http://dx.doi.org/10.2139/ssrn.3186093

Gregor Dorfleitner

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

Lars Hornuf (Contact Author)

University of Bremen - Faculty of Business Studies and Economics ( email )

Bremen, D-28359
Germany
+49 89 20348619 (Phone)

HOME PAGE: http://www.hornuf.com

Max Planck Institute for Innovation and Competition ( email )

Marstallplatz 1
Munich, Bayern 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Martina Weber

University of Regensburg - Department of Finance ( email )

Regensburg, 93040
Germany

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