Abstract
Herd behavior has been studied in a wide range of areas, such as fashion, online purchasing, and stock trading. However, to date, little attention has been paid to the herd behavior in online Peer-to-Peer lending market. With a decision tree, we model the formation of herding when decision makers with heterogeneous preferences are facing costly information acquiring and analyzing. Data from Prosper.com provides us with a good opportunity to explore empirical evidences for herd behavior. When herd behavior arises, individuals follow the behaviors of other people and generally ignore their own information which might cost them too much to obtain or analyze. Following this idea, we propose to detect herd behavior by focusing on investors’ decision-making time variation. We observed that friend bids and bid counts impose significant effects on the decision-making time of investors, which is considered as the evidence of herding. We also conduct empirical analyses to address the impact of herd behavior on an individual’s benefit. We reveal that lenders are more likely to herd on listings with more bids and friend bid, but their benefit will be reduced as the consequence of the behavior.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Akerlof G (1970) The market for ‘Lemons’: quality uncertainty and the market mechanism. Quart J Econ 84(3):488–500
Asch SE (1956) Studies of independence and conformity: a majority of one against a unanimous majority. Psychol Monogr 70(9):70–79
Avery CA, Chevalier JA (1999) Herding over the career. Econ Lett 63:327–333
Banerjee AV (1992) A simple model of herd behavior. Q J Econ 107(3):797–817
Banerjee AV, Fudenberg D (1995) Word-of-mouth learning. Working paper, Department of Economics, Massachusetts Institute of Technology
Bikhchandani S, Sharma S (2001) Herd behavior in financial markets. IMF Staff Papers 47(3):279–310
Bikhchandani S, Hirshleifer O, Welch I (1992) A theory of fads, fashion, custom, and cultural change as informational cascades. J Political Econ 100:992–1026
Brandenburger A, Polak B (1996) When managers cover their posteriors: making the decisions the market wants to see. Rand J Econ 27:523–541
Brunnermeier MK (2001) Asset pricing under asymmetric information: bubbles, crashes, technical analysis, and herding. Oxford University Press, Oxford
Calvo GA, Mendoza EG (2000) Rational herd behavior and globalization of securities markets. J Int Econ 51(1):79–113
Chen Y (2008) Herd behavior in purchasing books online. Comput Hum Behav 24:1977–1992
Devenow A, Welch I (1996) Rational herding in financial economics. Eur Econ Rev 40:603–615
Dholakia UM, Bagozzi RP (2001) Consumer behavior in digital environments. In: Wind J, Mahajan V (eds) Digital marketing: global strategies from the world’s leading experts. Wiley, New York, pp 163–200
Dholakia UM, Soltysinski K (2001) Coveted or overlooked? The psychology of bidding for comparable listings in digital auctions. Mark Lett 12(3):223–235
Everett CR (2010) Group membership, relationship banking and loan default risk: the case of online social lending. Available at SSRN: http://ssrn.com/abstract=1114428
Falkenstein E (1996) Preferences for stock characteristics as revealed by mutual fund portfolio holdings. J Finance 51:111–135
Freedman S, Jin GZ (2008) Do social networks solve information problems for peer-to-peer lending? Evidence from Prosper.Com. Available at SSRN: http://ssrn.com/abstract=1304138
Frith CD, Frith U (2008) Implicit and explicit processes in social cognition. Neuron 60:503–510
Froot KA, Scharfstein D, Stein JC (1992) Herd on the street Informational inefficiencies in a market with short-term speculation. J Finance XLVII 4:1461–1484
Graham JR (1999) Herding among investment newsletters: theory and evidence. J Finance LIV(1):237–268
Grinblatt M, Titman S, Wermers R (1995) Momentum investment strategies, portfolio performance, and herding: a study of mutual fund behavior. Am Econ Rev 85(5):1088–1105
Hamilton WD (1971) Geometry for the selfish herd. J Theor Biol 31:295–311
Hirshleifer D, Teoh SH (2003) Herd behavior and cascading in capital markets: a review and synthesis. Eur Financ Manag 9(1):25–66
Hirshleifer D, Subrahmanyam A, Titman S (1994) Security analysis and trading patterns when some investors receive private information before others. J Finance 49:1665–1698
Hoffer E (1955) The passionate state of mind. Harper and Row, New York
Iyer R, Khwaja AI, Luttmer EFP, Shue K (2009) Screening in new credit markets: can individual lenders infer borrower creditworthiness in peer-to-peer lending? Working paper, National Bureau of Economic Research
Jones SRG (1984) The economics of conformism. Blackwell, Oxford
Keynes JM (1936) The general theory of employment, lnterest and money. Macmillan, London
Kultti K, Miettinen P (2007) Herding with costly observation. BE J Theor Econ 7(1):1–14
Lakonishok J, Shleifer A, Vishny RW (1992) The impact of institutional trading on stock prices. J Financ Econ 32:23–43
Lee IH (1993) On the convergence of informational cascades. J Econ Theory 61:395–411
Leland HE, Pyle DH (1977) Informational asymmetries, financial structures, and financial intermediation. J Finance 32:371–387
Lin M, Prabhala NR, Viswanathan S (2009) Can social networks help mitigate information asymmetry in online markets? In: Proceedings of the 30th international conference on information systems, Phoenix, Arizona, USA
Lopez SH, Pao ASY, Bhattacharrya R (2009) The effects of social interactions on P2P lending. Working paper, MAS final project
Peles N (1993) The determinants of institutional demand for equity: an empirical study. Working paper, Columbia University
Nofsinger J, Sias R (1996) Herding by institutional and individual investors. Working paper, Marquette University
Phillips, PCB, Wu Y, Yu J (2009) Explosive behavior and the NASDAQ bubble in the 1990s: when did irrational exuberance escalate asset values? Int Econ Rev, in press. Also available at SSRN: http://ssrn.com/abstract=1413830
Prendergast C, Stole L (1996) Impetuous youngsters and jaded old-timers: acquiring a reputation for learning. J Political Econ 104:1105–1134
Puro L, Teich JE, Wallenius H, Wallenius J (2010) Borrower decision aid for people-to-people lending. Decis Support Syst 49:52–60
Raafat RM, Nick C, Frith C (2009) Herding in human. TRENDS Cogn Sci 13(10):420–428
Scharfstein DS, Stein JC (1990) Herd behavior and investment. Am Econ Rev 80(3):465–479
Simonsohn U, Ariely D (2008) When rational sellers face nonrational buyers: evidence from herding on eBay. Manag Sci 54(9):1624–1637
Smith L, Sorensen P (2000) Pathological outcomes of observational learning. Econometrica 68:371–398
Tard Gd, Parsons EWC (1903) The laws of imitation, H. Holt and Company, New York
Trueman B (1994) Analyst forecasts and herding behavior. Rev Financial Stud 7:97–124
Welch I (1992) Sequential sales, learning, and cascades. J Finance 47(2):695–732
Wermers R (1999) Mutual fund herding and the impact on stock prices. J Finance 54:581–622
Wylie S (1996) Tests of the accuracy of measures of herding using UK data. Working paper, London School of Business
Zwiebel J (1995) Corporate conservatism and relative compensation. J Political Econ 103:1–25
Acknowledgments
We are indebted to the anonymous reviewers for their helpful and constructive comments on the earlier draft. We also gratefully acknowledge the assistance of Jun Tan, Siming Li, Jiaxian Qiu and Tianxi Dong. This research is supported by the Center for Advanced Analytics and Business Intelligence of Texas Tech University, USA.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Luo, B., Lin, Z. A decision tree model for herd behavior and empirical evidence from the online P2P lending market. Inf Syst E-Bus Manage 11, 141–160 (2013). https://doi.org/10.1007/s10257-011-0182-4
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10257-011-0182-4