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Examining failure learning in online lending: Complete failure vs. incomplete failure.
Ji-Wen Li1, Qinghui Cui2, Jia-Jia Zhang3
1School of Management, Jilin University, Changchun, P. R. China.
Plos One
|November 9, 2021
Summary
Borrowers who experience loan failures in online lending learn differently. Incomplete failures improve future performance, while complete failures do not, though both can interact to enhance learning.
Area of Science:
- Financial Economics
- Behavioral Finance
- Information Economics
Background:
- Online lending platforms facilitate peer-to-peer transactions, creating unique learning environments for borrowers.
- Understanding borrower behavior, particularly responses to failure, is crucial for platform risk management and loan performance.
- Prior research has not fully disentangled the nuanced effects of different types and degrees of failure on subsequent borrower outcomes.
Purpose of the Study:
- To investigate the learning effects of borrower failures in online lending.
- To quantify the impact of failure degree on future loan funding success.
- To differentiate the learning outcomes between complete and incomplete funding failures.
Main Methods:
- Analysis of a large dataset of 610,000 online loan applications from Renrendai, a Chinese online lending platform, spanning six years.
- Utilizing the funding ratio of loan listings to measure the degree of borrower failure.
- Employing regression analysis and hypothesis testing to examine the relationship between prior failures and subsequent funding performance.
Main Results:
- A higher degree of prior loan failure is negatively correlated with future funding success.
- Complete borrower failure does not enhance learning for future loan applications.
- Incomplete borrower failure positively influences subsequent loan performance, with interaction effects observed between complete and incomplete failures.
Conclusions:
- The type and degree of failure significantly impact borrower learning in online lending.
- Incomplete failures offer a more effective learning mechanism than complete failures for improving future financial outcomes.
- Findings provide actionable insights for online lending platforms to refine risk assessment and borrower support strategies.
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