How Costly are Cultural Biases? Evidence from FinTech

67 Pages Posted: 8 Jan 2021 Last revised: 26 Oct 2021

See all articles by Francesco D'Acunto

Francesco D'Acunto

Boston College

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore

Rajiv Jain

affiliation not provided to SSRN

Alberto G. Rossi

Georgetown University

Date Written: October 25, 2021

Abstract

We exploit a leading FinTech peer-to-peer lending platform paired with an automated robo-advising lending tool to test for and quantify the effects of cultural biases in large-stake risky choices for which the scope for statistical discrimination is minimal. Comparing the choices lenders make with those made by the robo-advising tool on their behalf, we find that both in-group vs. out-group discrimination and stereotypical discrimination are pervasive and economically sizable. Discrimination makes lenders worse off in terms of consumption utility—discriminating lenders face 32% higher default rates and about 11% lower returns on the loans they issue to borrowers belonging to favored demographics, relative to borrowers in the discriminated groups. All the results are stronger for lenders who reside in regions where the salience of cultural biases is higher.

Keywords: Taste-based Discrimination, Statistical Discrimination, Cultural Finance, Robo-Advising, Lending, Disintermediation, Cultural Economics

JEL Classification: D90, G41, G51, J71, Z10

Suggested Citation

D'Acunto, Francesco and Ghosh, Pulak and Jain, Rajiv and Rossi, Alberto G., How Costly are Cultural Biases? Evidence from FinTech (October 25, 2021). Available at SSRN: https://ssrn.com/abstract=3736117 or http://dx.doi.org/10.2139/ssrn.3736117

Francesco D'Acunto (Contact Author)

Boston College ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Pulak Ghosh

Indian Institute of Management (IIMB), Bangalore ( email )

Bannerghatta Road
Bangalore, Karnataka 560076
India

Rajiv Jain

affiliation not provided to SSRN

Alberto G. Rossi

Georgetown University ( email )

McDonough School of Business
Georgetown University
Washington, DC 20057
United States

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