Among Peers: The Impact of Homophily in Online Investment

38 Pages Posted: 29 Mar 2022

See all articles by Daniel Czaja

Daniel Czaja

University of Giessen - Department of Financial Services

Philipp Ritter

affiliation not provided to SSRN

Oscar Anselm Stolper

University of Marburg | Behavioral Finance Research Group

Date Written: November 7, 2021

Abstract

We investigate if homophily—peoples’ affinity for similar others—is an issue in online investment, too. Drawing on nearly 22,000 loan applications and 54,000 investments obtained from one of the leading online peer-to-peer lending platforms in Europe, we document strong evidence in support of investor homophily even absent in-person interaction. Being in the same age group as a given investor increases a loan applicant’s odds of being funded by as much as 13%, while same-sex dyads are associated with 7% higher odds of investment. Moreover, an additional demographic similarity increases the average investment amount by more than 8%. Investors’ affinity for similar borrowers does not seem to reflect a preference for funding particular loan purposes. Finally, we document a significantly negative difference of -0.28 percentage points in risk-adjusted interest rates of loans associated with investor-borrower dyads exhibiting the highest versus lowest number of homophilous ties. While this could be rationalized by demographic commonalities reducing the cost of searching and processing investment-relevant information, results from additional analyses suggest otherwise. In sum, our evidence is hard to square with the notion that investors’ affinity for similar borrowers in online peer-to-peer lending exploits economic benefits to sameness.

Keywords: homophily, online investment, peer-to-peer lending, crowdfunding, funding probability, decision heuristics

JEL Classification: D12, D14, G20, G41

Suggested Citation

Czaja, Daniel and Ritter, Philipp and Stolper, Oscar Anselm, Among Peers: The Impact of Homophily in Online Investment (November 7, 2021). Available at SSRN: https://ssrn.com/abstract=4051944 or http://dx.doi.org/10.2139/ssrn.4051944

Daniel Czaja

University of Giessen - Department of Financial Services ( email )

Licher Str, 74
Giessen, 35394
Germany

Philipp Ritter

affiliation not provided to SSRN

Oscar Anselm Stolper (Contact Author)

University of Marburg | Behavioral Finance Research Group ( email )

Am Plan 1
Marburg, 35032
Germany

HOME PAGE: http://https://www.uni-marburg.de/de/fb02/professuren/bwl/behavioralfinance

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