Abstract
Making decisions over extended periods of time is cognitively taxing and can lead to decision fatigue, which is linked to a preference for the ‘default’ option, namely whatever decision involves relatively little cognitive effort. Such effects have been demonstrated across a number of applied settings, including forensic and clinical contexts. Previous research, however, has not quantified the cost of such suboptimal decisions. We assessed the magnitude of the negative consequences of decision fatigue in the finance sector. Using 26 501 credit loan applications evaluated by credit officers of a major bank, we show that in this real-life financial risk-taking context credit loan approvals across the course of a day decreased during midday compared with early or later in the workday, reflecting a preference for the default option. To quantify the economic loss associated with such decision variability, we then modelled the bank's additional credit collection if all decisions had been made during early morning levels of approval. This would have resulted in $509 023 extra revenue for the bank, for one month. Thus, we provide further evidence that is consistent with a pattern of decision fatigue, and that it can have a substantial negative impact in the finance sector that warrants considerations to counteract it.
Highlights
Poor risk management in banks has caused multiple financial crises due to loan losses
Examining the model’s regression coefficients, we found that the credit officers appropriately took known repayment risk factors into account: approvals were lower for larger loan amounts than smaller ones, and were lower if the company was small, the loan was not yet overdue, the customer had a low credit rating, or the customer was assigned a lower likelihood of repayment
Results from the current investigation show that in a real-life context, namely in the finance sector, extended periods of cognitive exertion are consistent with a pattern of decision fatigue: while early in variable case length decision time 11.00–11.59 12.00–12.59 13.00–13.59 14.00–14.59 15.00–15.59 16.00–16.59 17.00 or later Significance codes: ÃÃÃp < 0.001, ÃÃp < 0.01, Ãp < 0.1
Summary
Poor risk management in banks has caused multiple financial crises due to loan losses. Research on decision fatigue has demonstrated that it typically involves a tendency to revert to the ‘default’ option, namely whatever choice involves relatively little mental effort [3,4,5] Such decision fatigue has been documented across the workday in a number of applied settings, suggesting its relevance in practical, real-life context. Sometimes customers have difficulty making the agreed-upon monthly payment and seek a revision of the contract’s conditions Such restructuring proposals pose a dilemma for the bank: on the one hand approving the request results in a loss relative to adherence to the original payment plan, but on the other hand the loss is significantly smaller than if the loan is not repaid at all. Overall banks strive to maximize the number of loans that are repaid without restructuring while minimizing the risk of loan default. Risk assessment of restructuring proposals, involves binary choices of credit officers’ approval (yes/no) and customers’ subsequent loan repayment (yes/no), which provides an ideal context to test the quality of decisions rendered
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