Integrating Credit Models Using Accounting Information With Loan Officers' Decision Processes

Abstract

Abstract:This paper focuses on loan officers' cognitive processes of problem detection and problem‐hypothesis formulation, which are incorporated into a credit model when they are confronted with loan decisions. Prior credit models in banking have not directly addressed loan officers' internal processes in a loan situation. The integration of both loan officers' cognitive processes and information used in a credit model can better help explain their decision‐making biases. The results presented in this paper showed that information derived from a credit model influences loan officers' problem detection and problem‐hypothesis formulation, and these processes are important factors in their loan approval. To identify loan officers' decision‐making processes, the approach used in this paper integrates principles from financial management, economics, and cognitive psychology with methodological developments from psychometrics and econometrics.