Planning for Fund Seekers’ Deception in Peer-to-Peer Lending

Abstract

This article examines the likelihood of deception on the part of borrowers wishing to obtain credit from institutional or private lenders in Peer-to-Peer lending set-ups. In our first study, we identify five explanatory variables that account for nearly forty percent of the propensity to act deceitfully in such circumstances: a poor credit history, debt, risky behavior, and to a much lesser degree, irrational behavior and disconnection from the bundle of needs, goals, and preferences. For the second study, we remodeled the initial questionnaire to adapt it to the needs of lenders and borrowers who engage in on-line peer-to-peer lending, a growing business fueled in part by the COVID pandemic. We find that the three key psychological variables that help to assess the likelihood of deceitful behaviors and possible default on loan reimbursement—namely, risky behaviors, (ir)rationality, and (dis)connection—interact with each other to form a loop. This study presents two benefits: first, we provide evidence that it is to some degree possible to tighten control over lending practices in P2P settings. Second, we offer a new pragmatic tool to gauge potential borrowers’ deceit in the context of debt building, notably by combining psychological assessments with standard hard-data measures of risk.