Role of Narratives in Peer-to-Peer Lending Decisions S139
RESEARCH MOTIVATIONS AND CONTRIBUTIONS
The idea that narratives may involve the construction of a favorable identity poses two key questions for research.First, whereas narratives can provide diagnostic informa-tion to a decision maker who is considering an economicexchange, the veracity of the narrator’s story is difﬁcultto determine. Because a narrative offers the possibility of describing either an authentic, full, true self or a partial,inauthentic, misleading self, potential exchange partners areleft to intuit the truth of the presentation. Accordingly a keyquestion to consider is, given their potential for diagnosticand misleading information, to what extent do narrativesinﬂuence economic exchange transactions? Previous con-sumer research has largely focused on narratives of con-sumption experiences (Thompson 1996) or consumptionstories (Levy 1981), but scholars have not examined therole of narratives in economic exchanges. We believe thatnarratives may be a particularly powerful lens, in that theyallow the consumer to attempt to gain better control overthe exchange and thus can provide a means to help con-summate the exchange.Second, to what extent do narratives affect the perfor-mance and outcomes of an economic exchange? Narrativescholars claim that the construction and presentation of anarrative can shape its creator’s future behavior (Bruner1990) but rarely examine the nature of this inﬂuence empir-ically. Such an examination would be critical to understand-ing how a mixture of quantitative and qualitative factorsshapes outcome quality (e.g., Hoffman and Yates 2005).We examine these two questions using data from theonline P2P loan auctions website, Prosper.com, by studyingborrower-constructed narratives (particularly the identitiesembedded in them), the subsequent decisions of lenders,and transaction performance two years later. We deﬁneidentity claims as the ways that borrowers describe them-selves to others (Pratt, Rockmann, and Kaufmann 2006).Borrowers can construct an identity based on a range of ele-ments, such as religion or success. The elements become anidentity claim when they enter public discourse as opposedto private cognition. With this framework, we make severalcontributions.First, by developing and testing theory around how nar-ratives supplement more objective sources of informationthat decision makers use when considering a ﬁnancial trans-action, we draw attention to how narrators can intentionallyexploit uncertainty and favorably shape circumstantial factsto obtain resources, such as access to money in unmediatedenvironments. The narrative, as a supplementary, yet some-times deal-making or deal-breaking, information source fordecision makers is predicated on compelling stories versusobjective facts. It thus offers a means for people to recon-struct their pasts and describe their futures in positive ways.Second, by linking narratives to objective performancemeasures, we show how narratives may predict the longer-term performance of lending decisions. Because the deci-sion stakes are high in this unmediated and unsecuredﬁnancial arena, lenders engage in highly cognitive pro-cessing (Petty and Wegener 1998). The strong disincen-tive of potential ﬁnancial loss leads to cognitive process-ing, which tends to produce accurate attributions about aperson and the probabilities of future events (Osborne andGilbert 1992). Because of this motivation for accuracy, wesuspect lenders use narratives to help them make invest-ment decisions.Third, from a practice perspective, the recent ﬁnancialcrisis has exposed ﬂaws in the criteria used to make lend-ing decisions. Quantitative ﬁnancial metrics, such as creditscores, have proven unreliable for predicting the ability orlikelihood of consumers to repay unsecured loans (Feldman2009). A narrative perspective on the consummation andperformance of ﬁnancial transactions offers the promise of improving systems for assessing borrowers.
We conducted our research on Prosper.com (hereinafter,Prosper), the largest P2P loan auction site in the UnitedStates, with more than one million members and $238 mil-lion in personal loans originated since its inception inMarch 2006 (as of June 2011). On Prosper, borrowers andlenders never meet in person, so we can assess the role of narratives in overcoming the uncertainty that arises duringﬁnancial transactions between unacquainted actors.The process of borrowing and lending money througha loan auction on Prosper is as follows: Before postingtheir loan request, borrowers give Prosper permission to ver-ify relevant personal information (e.g., household income,home ownership, bank accounts) and access their creditscore from Experian, a major credit-reporting agency. Usingthis and other information, such as pay stubs and income taxreturns, Prosper assigns each borrower a credit grade thatreﬂects the risk to lenders. Credit grades can range from AA,which indicates that the borrower is extremely low risk (i.e.,high probability of paying back the loan), through A, B, C,D, and E to HR, which signiﬁes the highest risk of default.Borrowers then post loan requests for auction. When post-ing their loan auctions, borrowers choose the amount (up to$25,000) and the highest interest rate they will pay. Theyalso may use a voluntary open-text area, with unlimitedspace, to write anything they want—that is, the borrower’snarrative (see Michels 2011).After the listing becomes active, lenders decide whetherto bid, how much money to offer, and the interest rate.A $1,000 loan might be ﬁnanced by one lender who lends$1,000 or by 40 lenders, each lending $25 for example.Most lenders bid the minimum amount ($25) on individualloans to diversify their portfolios (Herzenstein, Dholakia,and Andrews 2011). After the auction closes, listings withbids that cover the requested amount are funded. If a list-ing receives bids covering more than its requested amount,the bids with the lowest interest rates win. If the auc-tion does not receive enough bids, the request remainsunfunded. Prosper administers the loan, collects payments,and receives fees of .5% to 3.0% from borrowers, as wellas a 1% annual fee from lenders.We employed three dependent variables in our study.First,
is the percentage of the loan requestto receive a funding commitment from lenders. For exam-ple, if a loan request for $1,000 receives bids worth $500,loan funding is 50%. If it receives bids worth $2,000, loanfunding equals 200%. A higher loan funding value signi-ﬁes greater lender interest. Second,
percentage reductionin ﬁnal interest rate
captures the decrease in the inter-est rate between the borrower’s maximum speciﬁed rateand the ﬁnal rate. For example, if a borrower’s maximum