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Rise of the Machines: The Impact of Automated Underwriting

Author

Listed:
  • Mark Jansen

    (Department of Finance, University of Utah, Salt Lake City, Utah 84103)

  • Hieu Quang Nguyen

    (Department of Applied Finance, Macquarie University, Sydney, New South Wales 2109, Australia)

  • Amin Shams

    (Department of Finance, Fisher College of Business, The Ohio State University, Columbus, Ohio 43210)

Abstract

Using a randomized experiment in auto lending, we find that algorithmic underwriting outperforms the human underwriting process, resulting in 10.2% higher loan profits and 6.8% lower default rates. The human and machine underwriters show similar performance for low-risk, less complex loans. However, the performance of human underwritten loans largely declines for riskier and more complex loans, whereas the machine performance stays relatively stable across various risk dimensions and loan characteristics. The performance difference is more pronounced at underwriting thresholds with a high potential for agency conflict. These results are consistent with algorithmic underwriting mitigating agency conflicts and humans’ limited capacity for analyzing complex problems.

Suggested Citation

  • Mark Jansen & Hieu Quang Nguyen & Amin Shams, 2025. "Rise of the Machines: The Impact of Automated Underwriting," Management Science, INFORMS, vol. 71(2), pages 955-975, February.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:2:p:955-975
    DOI: 10.1287/mnsc.2024.4986
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    Keywords

    lending; underwriting; FinTech; automation; household finance; agency conflicts;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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