IDEAS home Printed from https://ideas.repec.org/p/hhs/cesisp/0481.html
   My bibliography  Save this paper

Crowdfunding as Gambling: Evidence from Repeated Natural Experiments

Author

Listed:
  • Demir, Tolga

    (Sabanci University)

  • Mohammad, Ali

    (Copenhagen Business & School and Centre of Excellence for Science and Innovation Studies (CESIS), Royal Institute of Technology)

  • Shafi, Kourosh

    (California State University East Bay)

Abstract

We explore whether sensation-seeking, a personality trait that involves risk-taking for novelty and thrill, is one of the underlying motivations for participating in peer-to-peer lending crowdfunding markets. To empirically substantiate this argument, we test whether individuals participating in Prosper, one of the largest lending markets in the U.S., reduce their lending activity when gambling in the form of playing the multistate lotteries Powerball and Mega Millions becomes more attractive. Lottery is a repeated natural experiment: lottery jackpots are randomly won and a series of draws with no winners form large jackpots. We find that the thrill of winning a large jackpot lottery, perhaps intensified by advertising and media coverage around this event, fulfills some lenders' desire of sensation-seeking and substitutes participating in Prosper, decreasing their lending activity. We discuss implications for lenders and borrowers, as well as platform organizers and policy makers.

Suggested Citation

  • Demir, Tolga & Mohammad, Ali & Shafi, Kourosh, 2019. "Crowdfunding as Gambling: Evidence from Repeated Natural Experiments," Working Paper Series in Economics and Institutions of Innovation 481, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    • Handle: RePEc:hhs:cesisp:0481
    as

    Download full text from publisher

    File URL: https://static.sys.kth.se/itm/wp/cesis/cesiswp481.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Herzenstein, Michal & Dholakia, Utpal M. & Andrews, Rick L., 2011. "Strategic Herding Behavior in Peer-to-Peer Loan Auctions," Journal of Interactive Marketing, Elsevier, vol. 25(1), pages 27-36.
    2. Rodney Ramcharan & Christopher Crowe, 2013. "The Impact of House Prices on Consumer Credit: Evidence from an Internet Bank," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1085-1115, September.
    3. Giancarlo Giudici & Massimiliano Guerini & Cristina Rossi-Lamastra, 2018. "Reward-based crowdfunding of entrepreneurial projects: the effect of local altruism and localized social capital on proponents’ success," Small Business Economics, Springer, vol. 50(2), pages 307-324, February.
    4. Hornuf, Lars & Schwienbacher, Armin, 2018. "Market mechanisms and funding dynamics in equity crowdfunding," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 556-574.
    5. Alexandra Moritz & Joern H. Block, 2016. "Crowdfunding: A Literature Review and Research Directions," FGF Studies in Small Business and Entrepreneurship, in: Dennis Brüntje & Oliver Gajda (ed.), Crowdfunding in Europe, edition 1, pages 25-53, Springer.
    6. Keele, Luke & Kelly, Nathan J., 2006. "Dynamic Models for Dynamic Theories: The Ins and Outs of Lagged Dependent Variables," Political Analysis, Cambridge University Press, vol. 14(2), pages 186-205, April.
    7. Mark Grinblatt & Matti Keloharju, 2009. "Sensation Seeking, Overconfidence, and Trading Activity," Journal of Finance, American Finance Association, vol. 64(2), pages 549-578, April.
    8. Freedman, Seth & Jin, Ginger Zhe, 2017. "The information value of online social networks: Lessons from peer-to-peer lending," International Journal of Industrial Organization, Elsevier, vol. 51(C), pages 185-222.
    9. Oster, Emily, 2004. "Are All Lotteries Regressive? Evidence From the Powerball," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(2), pages 179-187, June.
    10. Newey, Whitney K & West, Kenneth D, 1987. "Hypothesis Testing with Efficient Method of Moments Estimation," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 777-787, October.
    11. Wilkins, Arjun S., 2018. "To Lag or Not to Lag?: Re-Evaluating the Use of Lagged Dependent Variables in Regression Analysis," Political Science Research and Methods, Cambridge University Press, vol. 6(2), pages 393-411, April.
    12. Cumming, Douglas & Groh, Alexander Peter, 2018. "Entrepreneurial finance: Unifying themes and future directions," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 538-555.
    13. Magdalena Cholakova & Bart Clarysse, 2015. "Does the Possibility to Make Equity Investments in Crowdfunding Projects Crowd Out Reward–Based Investments?," Entrepreneurship Theory and Practice, , vol. 39(1), pages 145-172, January.
    14. Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
    15. Henry Sauermann & Chiara Franzoni & Kourosh Shafi, 2019. "Crowdfunding scientific research: Descriptive insights and correlates of funding success," PLOS ONE, Public Library of Science, vol. 14(1), pages 1-26, January.
    16. Parhankangas, Annaleena & Renko, Maija, 2017. "Linguistic style and crowdfunding success among social and commercial entrepreneurs," Journal of Business Venturing, Elsevier, vol. 32(2), pages 215-236.
    17. Daniel Dorn & Paul Sengmueller, 2009. "Trading as Entertainment?," Management Science, INFORMS, vol. 55(4), pages 591-603, April.
    18. Alok Kumar, 2009. "Who Gambles in the Stock Market?," Journal of Finance, American Finance Association, vol. 64(4), pages 1889-1933, August.
    19. Cookson, J. Anthony, 2018. "When saving is gambling," Journal of Financial Economics, Elsevier, vol. 129(1), pages 24-45.
    20. Joern H. Block & Massimo G. Colombo & Douglas J. Cumming & Silvio Vismara, 2018. "New players in entrepreneurial finance and why they are there," Small Business Economics, Springer, vol. 50(2), pages 239-250, February.
    21. Signori, Andrea & Vismara, Silvio, 2018. "Does success bring success? The post-offering lives of equity-crowdfunded firms," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 575-591.
    22. Mingfeng Lin & Nagpurnanand R. Prabhala & Siva Viswanathan, 2013. "Judging Borrowers by the Company They Keep: Friendship Networks and Information Asymmetry in Online Peer-to-Peer Lending," Management Science, INFORMS, vol. 59(1), pages 17-35, August.
    23. Viotto da Cruz, Jordana, 2018. "Beyond financing: crowdfunding as an informational mechanism," Journal of Business Venturing, Elsevier, vol. 33(3), pages 371-393.
    24. Devin G. Pope & Justin R. Sydnor, 2011. "What’s in a Picture?: Evidence of Discrimination from Prosper.com," Journal of Human Resources, University of Wisconsin Press, vol. 46(1), pages 53-92.
    25. Juanjuan Zhang & Peng Liu, 2012. "Rational Herding in Microloan Markets," Management Science, INFORMS, vol. 58(5), pages 892-912, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Shafi, Kourosh & Mohammadi, Ali, 2020. "Too gloomy to invest: Weather-induced mood and crowdfunding," Journal of Corporate Finance, Elsevier, vol. 65(C).
    2. Farag, Hisham & Johan, Sofia, 2021. "How alternative finance informs central themes in corporate finance," Journal of Corporate Finance, Elsevier, vol. 67(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Demir, Tolga & Mohammadi, Ali & Shafi, Kourosh, 2022. "Crowdfunding as gambling: Evidence from repeated natural experiments," Journal of Corporate Finance, Elsevier, vol. 77(C).
    2. Samuel Ribeiro-Navarrete & Juan Piñeiro-Chousa & M. Ángeles López-Cabarcos & Daniel Palacios-Marqués, 2022. "Crowdlending: mapping the core literature and research frontiers," Review of Managerial Science, Springer, vol. 16(8), pages 2381-2411, November.
    3. Aurélien Petit & Peter Wirtz, 2022. "Experts in the crowd and their influence on herding in reward-based crowdfunding of cultural projects," Small Business Economics, Springer, vol. 58(1), pages 419-449, January.
    4. Nguyen, Thang & Cox, Joe & Rich, Judy, 2019. "Invest or regret? An empirical investigation into funding dynamics during the final days of equity crowdfunding campaigns," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 784-803.
    5. Borello, Giuliana & De Crescenzo, Veronica & Pichler, Flavio, 2019. "Factors for success in European crowdinvesting," Journal of Economics and Business, Elsevier, vol. 106(C).
    6. Maximilian Goethner & Sebastian Luettig & Tobias Regner, 2021. "Crowdinvesting in entrepreneurial projects: disentangling patterns of investor behavior," Small Business Economics, Springer, vol. 57(2), pages 905-926, August.
    7. Lihuan Guo & Wei Wang & Yenchun Jim Wu & Mark Goh, 2021. "How much do social connections matter in fundraising outcomes?," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 7(1), pages 1-23, December.
    8. Douglas Cumming & Lars Hornuf & Moein Karami & Denis Schweizer, 2023. "Disentangling Crowdfunding from Fraudfunding," Journal of Business Ethics, Springer, vol. 182(4), pages 1103-1128, February.
    9. Kazem Mochkabadi & Christine K. Volkmann, 2020. "Equity crowdfunding: a systematic review of the literature," Small Business Economics, Springer, vol. 54(1), pages 75-118, January.
    10. Kim, Jin-Hyuk & Newberry, Peter & Qiu, Calvin, 2022. "The role of information signals in determining crowdfunding outcomes," Journal of Empirical Finance, Elsevier, vol. 67(C), pages 168-181.
    11. Babak Naysary & Ruth Tacneng & Amine Tarazi, 2021. "Adoption of fintech services: role of saving and borrowing mechanisms," Working Papers hal-03335254, HAL.
    12. Belleflamme, Paul & Omrani, Nessrine & Peitz, Martin, 2015. "The economics of crowdfunding platforms," Information Economics and Policy, Elsevier, vol. 33(C), pages 11-28.
    13. Juliane Proelss & Denis Schweizer & Tingyu Zhou, 2021. "Economics of philanthropy—evidence from health crowdfunding," Small Business Economics, Springer, vol. 57(2), pages 999-1026, August.
    14. Douglas J. Cumming & Lars Hornuf, 2020. "Marketplace Lending of SMEs," CESifo Working Paper Series 8100, CESifo.
    15. Andreas Hoegen & Dennis M. Steininger & Daniel Veit, 2018. "How do investors decide? An interdisciplinary review of decision-making in crowdfunding," Electronic Markets, Springer;IIM University of St. Gallen, vol. 28(3), pages 339-365, August.
    16. Rosangela Feola & Massimiliano Vesci & Ezio Marinato & Roberto Parente, 2021. "Segmenting “digital investors”: evidence from the Italian equity crowdfunding market," Small Business Economics, Springer, vol. 56(3), pages 1235-1250, February.
    17. Boudreau, Kevin J. & Jeppesen, Lars Bo & Reichstein, Toke & Rullani, Francesco, 2021. "Crowdfunding as Donations to Entrepreneurial Firms," Research Policy, Elsevier, vol. 50(7).
    18. Ferretti, Riccardo & Venturelli, Valeria & Pedrazzoli, Alessia, 2021. "Do multiple competing offerings on a crowdfunding platform influence investment behavior?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    19. Helen Bollaert & Gaël Leboeuf & Armin Schwienbacher, 2020. "The narcissism of crowdfunding entrepreneurs," Small Business Economics, Springer, vol. 55(1), pages 57-76, June.
    20. Kormanyos, Emily & Hanspal, Tobin & Hackethal, Andreas, 2023. "Do gamblers invest in lottery stocks?," SAFE Working Paper Series 373, Leibniz Institute for Financial Research SAFE, revised 2023.

    More about this item

    Keywords

    Peer-to-peer lending; crowdfunding; lottery; gambling; Fin-Tech;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:cesisp:0481. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Vardan Hovsepyan (email available below). General contact details of provider: https://edirc.repec.org/data/cekthse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.