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Free University of Bozen-Bolzano

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Location Room BZ E4.22, Universitätsplatz 1 - Piazza Università, 1, 39100 Bozen-Bolzano

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Contact valerie.aloa@unibz.it

28 Mar 2019 12:30-13:30

Paralyzed by shock: The portfolio formation behavior of peer-to-business lending investors

Lars Hornuf, Martina Weber and Gregor Dorfleitner

Location Room BZ E4.22, Universitätsplatz 1 - Piazza Università, 1, 39100 Bozen-Bolzano

Departments Press and Events

Contact valerie.aloa@unibz.it

We study the investor behavior on a leading peer-to-business lending platform and identify a new investment mistake - a default shock bias. First, we find that investors stop investing in new loans and cease from diversifying their portfolio after experiencing a loan default. The default shock significantly worsens the risk-return profile of investors' loan portfolios. The defaults investors experience are often not beyond what could have been expected based on the information that was provided by the platform ex-ante. Second, investment experience on the platform is related to better investment decisions in general, but does not reduce the default shock bias. These findings have important implications not only for behavioral finance literature, but also more generally for new forms of Internet-based finance.