IDEAS home Printed from https://ideas.repec.org/a/eee/tefoso/v191y2023ics0040162523001567.html
   My bibliography  Save this article

Modelling credit and investment decisions based on AI algorithmic behavioral pathways

Author

Listed:
  • Rodgers, Waymond
  • Hudson, Robert
  • Economou, Fotini

Abstract

This paper provides a new approach to understanding bankers' risk-taking behavior. We build upon prior studies that suggest artificial intelligence algorithms are an effective approach to obtaining this understanding. Our approach uses behavioral finance and a unique decision-making model. Although the decision-making literature is replete with descriptions and explanations of creditors and investors' perceptions and judgment, it does not provide an algorithmic model that incorporates a more flexible approach to how creditors subjectively valuate risky projects. Specifically, a model is presented where 33 corporate bankers realized ex ante that they were unable to accurately model the underlying uncertainty that characterizes a company's need for a loan. The results indicate that bankers' risk assessments result in different evaluations of financial information regarding loans. This approach depicts an integrative algorithmic modelling process, whereby limits in the amount of historical conditional information prohibit the use of more complex econometric techniques.

Suggested Citation

  • Rodgers, Waymond & Hudson, Robert & Economou, Fotini, 2023. "Modelling credit and investment decisions based on AI algorithmic behavioral pathways," Technological Forecasting and Social Change, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:tefoso:v:191:y:2023:i:c:s0040162523001567
    DOI: 10.1016/j.techfore.2023.122471
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0040162523001567
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.techfore.2023.122471?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Itzhak Gilboa & David Schmeidler, 1995. "Case-Based Decision Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(3), pages 605-639.
    2. Daniel Kahneman & Dan Lovallo, 1993. "Timid Choices and Bold Forecasts: A Cognitive Perspective on Risk Taking," Management Science, INFORMS, vol. 39(1), pages 17-31, January.
    3. Robert J. Shiller, 2014. "Speculative Asset Prices (Nobel Prize Lecture)," Cowles Foundation Discussion Papers 1936, Cowles Foundation for Research in Economics, Yale University.
    4. Ulrike Malmendier & Geoffrey Tate, 2005. "CEO Overconfidence and Corporate Investment," Journal of Finance, American Finance Association, vol. 60(6), pages 2661-2700, December.
    5. Markku Kaustia & Milla Perttula, 2012. "Overconfidence and debiasing in the financial industry," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 4(1), pages 46-62, July.
    6. Richard H. Thaler & Amos Tversky & Daniel Kahneman & Alan Schwartz, 1997. "The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 647-661.
    7. Thaler, Richard H & Shefrin, H M, 1981. "An Economic Theory of Self-Control," Journal of Political Economy, University of Chicago Press, vol. 89(2), pages 392-406, April.
    8. J B Heaton, 2002. "Managerial Optimism and Corporate Finance," Financial Management, Financial Management Association, vol. 31(2), Summer.
    9. Kenneth R. MacCrimmon & Donald A. Wehrung, 1990. "Characteristics of Risk Taking Executives," Management Science, INFORMS, vol. 36(4), pages 422-435, April.
    10. Robert J. Shiller, 2014. "Speculative Asset Prices," American Economic Review, American Economic Association, vol. 104(6), pages 1486-1517, June.
    11. De Bondt, Werner F M & Thaler, Richard H, 1990. "Do Security Analysts Overreact?," American Economic Review, American Economic Association, vol. 80(2), pages 52-57, May.
    12. Tversky, Amos & Slovic, Paul & Kahneman, Daniel, 1990. "The Causes of Preference Reversal," American Economic Review, American Economic Association, vol. 80(1), pages 204-217, March.
    13. Sharma, Subhash & Mukherjee, Soumen & Kumar, Ajith & Dillon, William R., 2005. "A simulation study to investigate the use of cutoff values for assessing model fit in covariance structure models," Journal of Business Research, Elsevier, vol. 58(7), pages 935-943, July.
    14. J. B. Heaton, 2019. "Managerial optimism: New observations on the unifying theory," European Financial Management, European Financial Management Association, vol. 25(5), pages 1150-1167, November.
    15. Bacha, Sami & Azouzi, Mohamed Ali, 2019. "How gender and emotions bias the credit decision-making in banking firms," Journal of Behavioral and Experimental Finance, Elsevier, vol. 22(C), pages 183-191.
    16. Shiller, Robert J, 1995. "Conversation, Information, and Herd Behavior," American Economic Review, American Economic Association, vol. 85(2), pages 181-185, May.
    17. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    18. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    19. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    20. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 75(4), pages 643-669.
    21. Markku Kaustia & Milla Perttula, 2012. "Overconfidence and debiasing in the financial industry," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 4(1), pages 46-62, July.
    22. Somerville, R. A. & Taffler, R. J., 1995. "Banker judgement versus formal forecasting models: The case of country risk assessment," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 281-297, May.
    23. Malcolm Baker & Richard S. Ruback & Jeffrey Wurgler, 2004. "Behavioral Corporate Finance: A Survey," NBER Working Papers 10863, National Bureau of Economic Research, Inc.
    24. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
    25. Grether, David M & Plott, Charles R, 1979. "Economic Theory of Choice and the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 69(4), pages 623-638, September.
    26. Colin Camerer, 1998. "Bounded Rationality in Individual Decision Making," Experimental Economics, Springer;Economic Science Association, vol. 1(2), pages 163-183, September.
    27. Walter J. M. Kickert & John P. van Gigch, 1979. "A Metasystem Approach to Organizational Decision-Making," Management Science, INFORMS, vol. 25(12), pages 1217-1231, December.
    28. Shefrin, Hersh & Statman, Meir, 1994. "Behavioral Capital Asset Pricing Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 29(3), pages 323-349, September.
    29. Wright, William F. & Bower, Gordon H., 1992. "Mood effects on subjective probability assessment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 52(2), pages 276-291, July.
    30. Vicky Henderson, 2012. "Prospect Theory, Liquidation, and the Disposition Effect," Management Science, INFORMS, vol. 58(2), pages 445-460, February.
    31. Rodgers, Waymond, 1999. "The influences of conflicting information on novices and loan officers' actions," Journal of Economic Psychology, Elsevier, vol. 20(2), pages 123-145, April.
    32. Shiller, 021Robert J. & Pound, John, 1989. "Survey evidence on diffusion of interest and information among investors," Journal of Economic Behavior & Organization, Elsevier, vol. 12(1), pages 47-66, August.
    33. Rodgers, Waymond & Alhendi, Eyad & Xie, Feixue, 2019. "The impact of foreignness on the compliance with cybersecurity controls," Journal of World Business, Elsevier, vol. 54(6), pages 1-1.
    34. Geng Cui & Man Leung Wong & Hon-Kwong Lui, 2006. "Machine Learning for Direct Marketing Response Models: Bayesian Networks with Evolutionary Programming," Management Science, INFORMS, vol. 52(4), pages 597-612, April.
    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. Sun, Weixin & Zhang, Xuantao & Li, Minghao & Wang, Yong, 2023. "Interpretable high-stakes decision support system for credit default forecasting," Technological Forecasting and Social Change, Elsevier, vol. 196(C).
    2. Chi, Guotai & Dong, Bingjie & Zhou, Ying & Jin, Peng, 2024. "Long-horizon predictions of credit default with inconsistent customers," Technological Forecasting and Social Change, Elsevier, vol. 198(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. David Hirshleife, 2015. "Behavioral Finance," Annual Review of Financial Economics, Annual Reviews, vol. 7(1), pages 133-159, December.
    2. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    3. Stefano DellaVigna, 2009. "Psychology and Economics: Evidence from the Field," Journal of Economic Literature, American Economic Association, vol. 47(2), pages 315-372, June.
    4. Puri, Manju & Robinson, David T., 2007. "Optimism and economic choice," Journal of Financial Economics, Elsevier, vol. 86(1), pages 71-99, October.
    5. Véronique Bessière, 2007. "Excès de confiance des dirigeants et décisions financières:une synthèse," Revue Finance Contrôle Stratégie, revues.org, vol. 10(1), pages 39-66, March.
    6. Elie Matta & Jean McGuire, 2008. "Too Risky to Hold? The Effect of Downside Risk, Accumulated Equity Wealth, and Firm Performance on CEO Equity Reduction," Organization Science, INFORMS, vol. 19(4), pages 567-580, August.
    7. Bracha, Anat & Brown, Donald J., 2012. "Affective decision making: A theory of optimism bias," Games and Economic Behavior, Elsevier, vol. 75(1), pages 67-80.
    8. Romain Bocher, 2022. "The Intersubjective Markets Hypothesis," Journal of Interdisciplinary Economics, , vol. 34(1), pages 35-50, January.
    9. Bruno S. Frey & Reiner Eichenberger, 1989. "Should Social Scientists Care about Choice Anomalies?," Rationality and Society, , vol. 1(1), pages 101-122, July.
    10. Zamri Ahmad & Haslindar Ibrahim & Jasman Tuyon, 2017. "Institutional investor behavioral biases: syntheses of theory and evidence," Management Research Review, Emerald Group Publishing Limited, vol. 40(5), pages 578-603, May.
    11. Aloysius, John A., 2005. "Ambiguity aversion and the equity premium puzzle: A re-examination of experimental data on repeated gambles," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 34(5), pages 635-655, October.
    12. Hueber, Laura & Schwaiger, Rene, 2022. "Debiasing through experience sampling: The case of myopic loss aversion," Journal of Economic Behavior & Organization, Elsevier, vol. 198(C), pages 87-138.
    13. Koch, Alexander K. & Nafziger, Julia, 2016. "Goals and bracketing under mental accounting," Journal of Economic Theory, Elsevier, vol. 162(C), pages 305-351.
    14. Bilgehan TEKİN, 2019. "The Factors Affecting Capital Structure: A Panel Data Analysis in the Context of Behavioural Corporate Finance," Sosyoekonomi Journal, Sosyoekonomi Society, issue 27(42).
    15. Gary Charness & Uri Gneezy, 2010. "Portfolio Choice And Risk Attitudes: An Experiment," Economic Inquiry, Western Economic Association International, vol. 48(1), pages 133-146, January.
    16. Ritika & Nawal Kishor, 2020. "Development and validation of behavioral biases scale: a SEM approach," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 14(2), pages 237-259, November.
    17. Floris Heukelom, 2007. "Who are the Behavioral Economists and what do they say?," Tinbergen Institute Discussion Papers 07-020/1, Tinbergen Institute.
    18. Robert A. Lowe & Arvids A. Ziedonis, 2006. "Overoptimism and the Performance of Entrepreneurial Firms," Management Science, INFORMS, vol. 52(2), pages 173-186, February.
    19. Michael Dempsey, 2015. "Stock Markets, Investments and Corporate Behavior:A Conceptual Framework of Understanding," World Scientific Books, World Scientific Publishing Co. Pte. Ltd., number p1007, August.
    20. Thomas J. Lopez & Troy Pollard & Austin Reitenga & Shane Stinson, 2023. "Downsizing decisions: The joint influence of equity incentives and behavioral biases," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(9-10), pages 1779-1807, October.

    More about this item

    Keywords

    Decision-making; Risk aversion; Throughput modelling; Banking; Artificial intelligence;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

    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:eee:tefoso:v:191:y:2023:i:c:s0040162523001567. 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: Catherine Liu (email available below). General contact details of provider: http://www.sciencedirect.com/science/journal/00401625 .

    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.