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Financial literacy in for-profit vs pro-social peer-to-peer lending

Financial literacy in for-profit vs pro-social peer-to-peer lending Peer-to-peer (P2P) lending facilitates direct online lending and aims to provide financial inclusion and investment returns. Lender goals range from for-profit to pro-social and objective information is limited, which highlights the need to examine heuristics.Design/methodology/approachThis study examines 1,347 lending decisions by finance students on a mock P2P site. Testimonials were used to randomly condition the financially literate lenders towards for-profit or pro-social decision-making. Each investor evaluated three loans. The three loan applications were identical except for a female or male headshot (vs an icon) and random reports of 50% funding for the female or male loan in 3 days (vs 11 days for opposite gender and 7 for icon). Previous research surveys students on a mock platform (Gonzalez, 2020) and reports similar heuristics and lifelike decisions in student and general population samples (Gonzalez and Komarova, 2014).FindingsLenders randomly conditioned towards pro-social lending state lower trust in borrowers. However, pro-social investors state lower risk in P2P lending and higher financial literacy. Second, pro-social investors are more confident when lending to borrowers highly trusted by other lenders, especially if the popular loan applicant is female. Third, pro-social conditioning increases lending to male applicants when the popular loan applicant is female. Fourth, pro-social investors who have experienced financial trauma have greater confidence in bad loan recovery.Originality/valueThis is the first study of heuristics in pro-social vs for-profit P2P lending. In addition, it shows that testimonials can effectively condition lending goals and affect trust and risk perceptions. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Financial literacy in for-profit vs pro-social peer-to-peer lending

Managerial Finance , Volume 49 (2): 23 – Jan 26, 2023

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References (44)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-07-2021-0329
Publisher site
See Article on Publisher Site

Abstract

Peer-to-peer (P2P) lending facilitates direct online lending and aims to provide financial inclusion and investment returns. Lender goals range from for-profit to pro-social and objective information is limited, which highlights the need to examine heuristics.Design/methodology/approachThis study examines 1,347 lending decisions by finance students on a mock P2P site. Testimonials were used to randomly condition the financially literate lenders towards for-profit or pro-social decision-making. Each investor evaluated three loans. The three loan applications were identical except for a female or male headshot (vs an icon) and random reports of 50% funding for the female or male loan in 3 days (vs 11 days for opposite gender and 7 for icon). Previous research surveys students on a mock platform (Gonzalez, 2020) and reports similar heuristics and lifelike decisions in student and general population samples (Gonzalez and Komarova, 2014).FindingsLenders randomly conditioned towards pro-social lending state lower trust in borrowers. However, pro-social investors state lower risk in P2P lending and higher financial literacy. Second, pro-social investors are more confident when lending to borrowers highly trusted by other lenders, especially if the popular loan applicant is female. Third, pro-social conditioning increases lending to male applicants when the popular loan applicant is female. Fourth, pro-social investors who have experienced financial trauma have greater confidence in bad loan recovery.Originality/valueThis is the first study of heuristics in pro-social vs for-profit P2P lending. In addition, it shows that testimonials can effectively condition lending goals and affect trust and risk perceptions.

Journal

Managerial FinanceEmerald Publishing

Published: Jan 26, 2023

Keywords: Financial literacy; Peer to peer lending; Pro-social; Financial inclusion; G01; G20; G41

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