How costly are cultural biases? Evidence from FinTech

Document Type

Article

Publication Title

Journal of financial Economics

Abstract

We study the nature and effects of cultural biases in choice under risk and uncertainty by comparing peer-to-peer loans the same individuals (lenders) make alone and after observing robo-advised suggestions. When unassisted, lenders are more likely to choose co-ethnic borrowers, facing 8% higher defaults and 7.3pp lower returns. Robo-advising does not affect diversification but reduces lending to high-risk co-ethnic borrowers. Lenders in locations with high inter-ethnic animus drive the results, even when borrowers reside elsewhere. Biased beliefs explain these results better than a conscious taste for discrimination: lenders barely override robo-advised matches to ethnicities they discriminated against when unassisted.

Publication Date

28-2-2023

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