Rise of the Machines: The Impact of Automated Underwriting

Fisher College of Business Working Paper No. 2020-03-019

Charles A. Dice Center Working Paper No. 2020-19

83 Pages Posted: 31 Jul 2020 Last revised: 18 May 2021

See all articles by Mark Jansen

Mark Jansen

University of Utah - Department of Finance

Hieu Nguyen

University of Utah - David Eccles School of Business

Amin Shams

Ohio State University, Fisher College of Business

Date Written: May 18, 2021

Abstract

Using a randomized experiment in auto lending, we show that algorithmic underwriting outperforms the human underwriting process, resulting in 10.2% higher loan profits and 6.8% lower default rates. The machine performance is more stable across various risk dimensions and loan characteristics, whereas the performance of human underwritten loans largely declines for riskier and more complex loans. Moreover, 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 (May 18, 2021). Fisher College of Business Working Paper No. 2020-03-019, Charles A. Dice Center Working Paper No. 2020-19, 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
Salt Lake City, UT 84112
United States
801-213-6910 (Phone)

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

Hieu Nguyen

University of Utah - David Eccles School of Business ( email )

1645 E Campus Center Dr
Salt Lake City, UT 84112-9303
United States

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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