Bounded rationality in a P2P lending market

Abstract

Purpose

This study seeks to provide a systematic analysis of bounded rationality expressed by individual lenders in a Peer-to-peer (P2P) lending market.

Design/methodology/approach

26,383 personal loan listings collected from Moneyauction in Korea, were analyzed with binary logit regression. 6 hypothesis based on bounded rationality theory were constructed and tested. Binary logit regression was employed as both dependent variables have binary characteristics and can thus be assigned values equal to 0 or 1.

Findings

The results confirm that individual P2P lenders make their funding decisions based on bounded rationality, arousing from cognitive limitations, incomplete information, and time constraints.

Research limitations/implications

By adopting the theory of bounded rationality, this study attempts to prepare the theoretical background for an explanation of the decision behavior of individual lenders in a P2P lending market.

Practical implications

The findings of this research emphasize the importance of the platform provider's role to facilitate the sustainable market growth of P2P lending as an alternative form of finance. As the rationality of individual lenders is bounded during their decision-making process according to the research findings, the platform provider must continuously adjust their decision criteria by referencing the cumulative loan repayment data.

Originality/value

This study attempts to identify for the first time the suboptimal decision making by individual lenders in a P2P lending market on the basis of bounded rationality theory.

Citation

Kim, D. (2021), "Bounded rationality in a P2P lending market", Review of Behavioral Finance, Vol. 13 No. 2, pp. 184-201. https://doi.org/10.1108/RBF-10-2019-0141