How Costly are Cultural Biases? Evidence from FinTech
69 Pages Posted: 8 Jan 2021 Last revised: 28 Feb 2023
Date Written: October 25, 2021
We study the nature and effects of cultural biases in choice under risk and uncertainty by comparing peer-to-peer loans the same individuals (lenders) make alone and after observing robo-advised suggestions. When unassisted, lenders are more likely to choose co-ethnic borrowers, facing 8% higher defaults and 7.3pp lower returns. Robo-advising does not affect diversification but reduces lending to high-risk co-ethnic borrowers. Lenders in locations with high inter-ethnic animus drive the results, even when borrowers reside elsewhere. Biased beliefs explain these results better than a conscious taste for discrimination: lenders barely override robo-advised matches to ethnicities they discriminated against when unassisted.
Keywords: Taste-based Discrimination, Statistical Discrimination, Cultural Finance, Robo-Advising, Lending, Disintermediation, Cultural Economics
JEL Classification: D90, G41, G51, J71, Z10
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