Are All Heuristics Created Equal? Evidence from P2P Investments

62 Pages Posted: 8 May 2020 Last revised: 18 May 2020

See all articles by Maggie Rong Hu

Maggie Rong Hu

Chinese University of Hong Kong

Xiaoyang Li

The Chinese University of Hong Kong (CUHK)

Yang Shi

The Chinese University of Hong Kong (CUHK)

Xiaoquan (Michael) Zhang

Chinese University of Hong Kong; Massachusetts Institute of Technology (MIT) - Center for Digital Business

Date Written: April 14, 2020

Abstract

Heuristics have a ubiquitous influence on decision-making. Despite a large strand of literature on various heuristics, scant research addresses the concurrent applications of different heuristics or the interplay amongst them. Using detailed peer-to-peer (P2P) investment data from Renrendai, a leading Chinese P2P lending platform, we make the first attempt to uncover the relationship between two important numerological heuristics: the round-number heuristic and the lucky-number heuristic. We document a substitution relationroship between these two heuristics. The selection of round numbers versus lucky numbers for the loan amount reveals borrowers’ credit quality and affects the loan funding success rate, though the ex post performance of funded loans is similar. Lenders also apply heuristics in setting the bid amount, which potentially reveals information about their activeness and risk preference. As lenders become more experienced, they form more sophisticated judgments about the loan quality from borrowers’ use of heuristics. Overall, our paper reveals the heterogeneities and interlacing of heuristics by establishing a framework to extract information about individuals’ characteristics and preferences from the heuristics they use. Our findings are generalizable to many other real-life situations.

Keywords: Round-number heuristic, Lucky-number heuristic, information asymmetry, P2P lending

JEL Classification: G20, G21, G23, G40, G41, D91

Suggested Citation

Hu, Maggie Rong and Li, Xiaoyang and Shi, Yang and Zhang, Xiaoquan (Michael), Are All Heuristics Created Equal? Evidence from P2P Investments (April 14, 2020). Available at SSRN: https://ssrn.com/abstract=3575390 or http://dx.doi.org/10.2139/ssrn.3575390

Maggie Rong Hu

Chinese University of Hong Kong ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Hong Kong, N.T.
Hong Kong

Xiaoyang Li (Contact Author)

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong

Yang Shi

The Chinese University of Hong Kong (CUHK) ( email )

Shatin, N.T.
Hong Kong
Hong Kong
53167723 (Phone)

Xiaoquan (Michael) Zhang

Chinese University of Hong Kong ( email )

Shatin, N.T.
Hong Kong

Massachusetts Institute of Technology (MIT) - Center for Digital Business ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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