Rise of the Machines: The Impact of Automated Underwriting

Forthcoming at Management Science

77 Pages Posted: 31 Jul 2020 Last revised: 10 Jul 2023

See all articles by Mark Jansen

Mark Jansen

University of Utah - Department of Finance

Hieu Nguyen

Macquarie University, Macquarie Business School

Amin Shams

Ohio State University, Fisher College of Business

Date Written: January 31, 2023

Abstract

Using a randomized experiment in auto lending, we find that algorithmic underwriting outperforms the human underwriting process, resulting in 10.2% higher loan profits and 6.8% lower default rates. The human and machine underwriters show similar performance for low-risk, less complex loans. However, the performance of human underwritten loans largely declines for riskier and more complex loans, whereas the machine performance stays relatively stable across various risk dimensions and loan characteristics. The performance difference is more pronounced at underwriting thresholds with a high potential for agency conflict. These results are consistent with algorithmic underwriting mitigating agency conflicts and humans’ limited capacity for analyzing complex problems.

Keywords: Lending, Underwriting, FinTech, Automation, Household Finance, Agency Conflicts

JEL Classification: O33, G21, D14

Suggested Citation

Jansen, Mark and Nguyen, Hieu and Shams, Amin, Rise of the Machines: The Impact of Automated Underwriting (January 31, 2023). Forthcoming at Management Science, Available at SSRN: https://ssrn.com/abstract=3664708 or http://dx.doi.org/10.2139/ssrn.3664708

Mark Jansen

University of Utah - Department of Finance ( email )

David Eccles School of Business
1655 Campus Center Dr.
Salt Lake City, UT 84112
United States
801-213-6910 (Phone)

HOME PAGE: http://eccles.utah.edu/team/mark-jansen/

Hieu Nguyen

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

Amin Shams (Contact Author)

Ohio State University, Fisher College of Business ( email )

2100 Neil Ave
Columbus, OH 43210
United States

HOME PAGE: http://Aminshams.com

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