Are All Heuristics Created Equal? Evidence from P2P Investments

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