Peer-to-peer lending and the unreliability of good-looking people

Posted by Justin Fox Wednesday, July 1, 2009 at 2:00 pm

2 Comments • Trackback (1)

Peer-to-peer lending is the would-be Web 2.0 replacement for our naughty banking system. In recent months I've had visits from both Prosper CEO Chris Larsen and Kiva CEO Premal Shah. Larsen waxed eloquent about how Prosper's peer-to-peer approach amounted to a better, more transparent alternative to loan securitization. Shah talked about how Kiva, a non-profit whose lenders don't charge interest, has created a new form of risk capital somewhere between charity and, well, capitalism. Then I heard an executive at a big bank grumble that he didn't understand how peer-to-peer lenders with only superficial online contact with borrowers could do an adequate job of risk assessment. Not that banks always do an adequate job of risk assessment either ...

Now Columbia Biz School prof Ray Fisman has a nice rundown, in Slate, of what academic researchers have learned so far about peer-to-peer lending. The upshot seems to be that peer-to-peer lenders don't do a demonstrably worse job of assessing credit than banks do. They're not perfect, though:

My colleague Enrichetta Ravina has documented that there is a massive beauty premium—i.e., cheap loans for pretty women—enjoyed by Prosper borrowers, despite the fact that better-looking people are in fact more likely to default on their loans. Economists Devin Pope and Justin Sydnor find that racial discrimination also taints the online loan market—black borrowers are much less likely to obtain funding and more likely to pay higher interest rates relative to otherwise-similar whites looking for financing.

My favorite bit of information here is that "better-looking people are ... more likely to default on their loans." Think we can factor looks into credit scores?