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Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors

Author

Listed:
  • Gregor Dorfleitner
  • Lars Hornuf
  • Martina Weber

Abstract

We study the investor behavior on a leading peer-to-business lending platform and identify a new investment mistake – a default shock bias. First, we find that investors stop investing in new loans and cease from 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 could have been expected based on 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 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, 2018. "Paralyzed by Shock: The Portfolio Formation Behavior of Peer-to-Business Lending Investors," CESifo Working Paper Series 7092, CESifo.
    • Handle: RePEc:ces:ceswps:_7092
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    Cited by:

    1. Christa Hainz & Lars Hornuf & Lisa Nagel & Sarah Reiter & Eliza Stenzhorn, 2019. "Exemption Provisions of the German Small Investor Protection Act: A Follow-up Study," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 17(02), pages 41-51, August.
    2. 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).
    3. Christa Hainz & Lars Hornuf & Lisa Nagel & Sarah Reiter & Eliza Stenzhorn & Sarah Kiesl-Reiter, 2019. "Die Befreiungsvorschriften des Kleinanlegerschutzgesetzes: Eine Follow-up-Studie," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 72(09), pages 26-37, May.

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    More about this item

    Keywords

    behavioral finance; investment bias; peer-to-business lending; crowdlending; RAROC; diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G40 - Financial Economics - - Behavioral Finance - - - General

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