Are investors rational or perceptual in P2P lending?

This paper addresses the research on investor decision-making behaviors in peer-to-peer (P2P) lending from the perspective of rationality and sensibility not only to more thoroughly examine the factors affecting P2P lending but also to contribute to P2P platform builders’ and investees’ knowledge. We test investors’ rational choice behaviors using indices such as interest rates and investees’ monthly income and test perceptual choice using the identifiable victim effect. These tests attempt to determine whether investors prefer identifiable investees and whether this identification, as measured by social distance, affects the amount of investment. The panel data collected through the experiments are used to construct Probit and Tobit models, which address a combination of rationality and sensibility. The empirical results show that investors prefer large, short-term, high-interest loans and that investors are more likely to bid for such loans. In addition, investees find it easier to obtain funding when they share similar characteristics—in particular, a birthplace, location or ethnicity—with investors. Moreover, investees find it easier to obtain more funding when they share a similar birthplace, location or occupation with investors, whereas investees with an “identifiable” educational background find securing more funding to be more difficult. Furthermore, for a specific bidding amount, there are substitution effects between occupation and location, occupation and ethnicity, birthplace and education, and birthplace and age, which make it disadvantageous to increase the similarities across those dimensions. Finally, there are complementary effects between education and occupation and between education and age. However, there is an inverted-U relationship between social distance and bidding amount that determines whether rationality or sensibility dominate investors’ decisions.