Crowdfunding as Gambling: Evidence from Repeated Natural Experiments

Abstract

We explore whether sensation-seeking, a personality trait that involves risk-taking for novelty and thrill, is one of the underlying motivations for participating in peer-to-peer lending crowdfunding markets. To empirically substantiate this argument, we test whether individuals participating in Prosper, one of the largest lending markets in the U.S., reduce their lending activity when gambling in the form of playing the multistate lotteries Powerball and Mega Millions becomes more attractive. Lottery is a repeated natural experiment: lottery jackpots are randomly won and a series of draws with no winners form large jackpots. We find that the thrill of winning a large jackpot lottery, perhaps intensified by advertising and media coverage around this event, fulfills some lenders' desire of sensation-seeking and substitutes participating in Prosper, decreasing their lending activity. We discuss implications for lenders and borrowers, as well as platform organizers and policy makers.JEL Classification: G23, G41.

Distrust in Banks and Fintech Participation: The Case of Peer-to-Peer Lending

“…We contribute to extant research that explore P2P lenders' motivations (Demir et al, 2019;. Crowdfunding literature has highlighted both intrinsic and extrinsic motivations, including earlier access to innovative products and ideas, making an impact, sympathy, a desire to help others, feeling good about oneself, recognition from others, image promotion and social reputation, and sensation seeking (Boudreau et al, 2015;Cholakova & Clarysse, 2015;Colombo et al, 2015;Demir et al, 2019;Galak et al, 2011). We are able to offer a new motivation and further delineate the moderating conditions associated with this new motivation by choosing a crowdfunding type that offers (lending) functions comparable to those of banks and by employing geographic variations on expressed distrust in banks.…”

“…Finally, Daskalakis and Yue (2017) surveyed crowdfunders on their motivations and report that "interest and excitement" comes second to financial returns in reasons to participate in P2P lending. Demir et al (2019) find that sensation seeking is a motivating factor behind the decision to lend on Prosper. com.…”

Essays on Financial Technology and SME Finance: A Tale of Two Effects of the Global Financial Crisis: Financing SMEs and Innovative Financing

“…This study contributes to extant research that explore P2P lenders' motivations (Shafi & Mohammadi, 2019;Demir et al, 2019). Crowdfunding literature has highlighted both intrinsic and extrinsic motivations, including earlier access to innovative products and ideas, making an impact, sympathy, a desire to help others, feeling good about oneself, recognition from others, image promotion and social reputation, and sensation seeking (Boudreau et al, 2018;Colombo et al, 2015;Demir et al, 2019;Cholakova & Clarysse, 2015;Galak, Small, & Stephen, 2011). It is able to offer a new motivation and further delineate the moderating conditions associated with this new motivation by choosing a crowdfunding type that offers (lending) functions like those of banks and by employing geographic variations on expressed distrust in banks.…”

“…Finally, Daskalakis and Yue (2017) surveyed crowdfunders in Germany, Spain, and Poland about their motivations and report that "interest and excitement" is ranked as the second most important motivation, following financial returns as the number one reason to participate in P2P lending. Demir, Mohammadi, and Shafi (2019) find that sensation seeking is a motivating factor behind the decision to lend on Prosper.com. The research examines whether distrust in banks constitutes a relevant driver of P2P lending.…”

“…This is an example of fintech data that allows for researching investors' and the crowds' decisions with more granularity than possible before. Researchers have used this very platform's data to investigate the effect of home bias (Lin & Viswanathan, 2015), heterogeneous risk aversion given wealth (Paravisini, Rappoport, & Ravina, 2017), trustworthiness (Duarte, Siegel, & Young, 2012), beauty (Ravina, 2008), creditworthiness assessments (Iyer, Khwaja, Luttmer, & Shue, 2016;Lin et al, 2013), sensation-seeking (Demir, Mohammadi, & Shafi, 2019) and rational herding (Zhang & Liu, 2012) on investor's decisions.…”