Overconfidence and risk seeking in credit markets: an experimental game

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Date: July 2016
From: Review of Managerial Science(Vol. 10, Issue 3)
Publisher: Springer
Document Type: Report
Length: 276 words

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Abstract :

To access, purchase, authenticate, or subscribe to the full-text of this article, please visit this link: http://dx.doi.org/10.1007/s11846-015-0166-8 Byline: David Peon (1,2), Manel Antelo (3), Anxo Calvo (2) Keywords: Experimental economics; Business simulation games; Banking; Credit markets; Overconfidence; Prospect theory; C91; D03; D81; G21 Abstract: Behavioral biases may influence bank decisions when granting credit to their customers. This paper explores this possibility in an experimental setting, contributing to the literature in two ways. First, we designed a business simulation game that replicates the basic decision-making processes of a bank granting credit to clients under conditions of risk and uncertainty. Second, we implemented a series of short tests to measure participants' overconfidence and risk profile according to prospect theory and then conduct an experimental implementation of the simulation game. We find that higher levels of overprecision and risk seeking for gains (mostly attributable to distortion of probabilities) foster lower prices and higher volumes of credit, and reduce quality. The most consistent result is that distortion of probabilities affects the ability to discriminate between the quality of borrowers according to objective information, fostering strategies of lower loan prices to lower quality clients. The external validity of the results is also discussed. Author Affiliation: (1) Grupo BBVA, A Coruna, Spain (3) Department of Economics, University of Santiago de Compostela, Campus Norte, 15782, Santiago de Compostela, Spain (2) Department of Financial Economics and Accountancy, University of A Coruna, Campus Elvina s/n, 15071, A Coruna, Spain Article History: Registration Date: 05/02/2015 Received Date: 03/04/2014 Accepted Date: 05/02/2015 Online Date: 04/03/2015 Article note: Electronic supplementary material The online version of this article (doi: 10.1007/s11846-015-0166-8) contains supplementary material, which is available to authorized users.

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Gale Document Number: GALE|A456993852