Follow the Profit or the Herd? Exploring Social Effects in Peer-to-Peer Lending

Coco Krumme · Andrew Lippman

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FinTech, Crowdfunding, Digital Finance Complex Network Analysis Techniques Complex Systems and Time Series Analysis

Abstract

This paper examines the impacts of social factors on lenders' decision-making in online peer-to-peer (P2P) lending. Data collected from a major U.S. online loan marketplace, Prosper.com, have been analyzed. We propose a model based on preferential attachment and fragmentation to model the bidding behavior of lenders. Our data analysis presents strong empirical evidence that there were significant herding effects when lenders made their investment decisions on loan listings. The distribution of the number of bids put on loan listings exhibits a power law with an exponential cutoff, which matches what the model predicts. The paper concludes that lenders on Prosper did not make rational investment decisions based on risk and returns, but followed the herd.

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References

1992A Simple Model of Herd Behavior 1988Herd Behavior and Investment 2000HERD BEHAVIOR AND AGGREGATE FLUCTUATIONS IN FINANCIAL MARKETS 2010Strategic Herding Behavior in Peer-to-Peer Loan Auctions 2000Transmission of Information and Herd Behavior: An Application to Financial Markets 2013Emergence of Financial Intermediaries on Electronic Markets: The Case of Online P2P Lending 2011Learning by Doing with Asymmetric Information: Evidence from Prosper.com 2009Online Peer-to-Peer Lending: A Lenders' Perspective

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