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Paralyzed by shock: the portfolio formation behavior of peer-to-business lending investors

Author

Listed:
  • Gregor Dorfleitner

    (University of Regensburg
    Hanken School of Economics)

  • Lars Hornuf

    (University of Bremen
    CESifo)

  • Martina Weber

    (University of Regensburg)

Abstract

We examine investor behavior on a leading peer-to-business lending platform and identify an investment mistake that we refer to as default shock bias. First, we find that investors stop investing in new loans and cease diversifying their portfolio after experiencing a loan default. The default shock significantly worsens the risk–return profile of investors’ loan portfolios. The defaults investors experience are often not beyond what would have been expected from the information that was provided by the platform ex ante. Second, investment experience on the platform is related to better investment decisions in general, but it does not reduce the default shock bias. These findings have important implications not only for the behavioral finance literature but also more generally for new forms of Internet-based finance.

Suggested Citation

  • Gregor Dorfleitner & Lars Hornuf & Martina Weber, 2023. "Paralyzed by shock: the portfolio formation behavior of peer-to-business lending investors," Review of Managerial Science, Springer, vol. 17(3), pages 1037-1073, April.
    • Handle: RePEc:spr:rvmgts:v:17:y:2023:i:3:d:10.1007_s11846-022-00544-6
    DOI: 10.1007/s11846-022-00544-6
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    More about this item

    Keywords

    Behavioral finance; Investment bias; Peer-to-business lending; Crowdlending; Risk-adjusted return on capital; Diversification;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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