An Analysis Of Investors' Learning In Chinese Online Lending Market

Investors' learning behavior is one hot spot in modern financial research.Most researchers delved into stock market to study individual investors' learning,in which serious limitations lurk.This study finds that online lending market,also known as P2 P lending market,provides an ideal alternative to stock market,and takes advantage of a well-known Chinese online lending platform to study the following questions: Do P2 P investors learn? How do they learn? What drives their learning process?Firstly,this paper studies whether P2 P investors learn.Using actual trading data from Renrendai,we find that investors increase their returns as they spend more time in the market.This serves as an evidence of the existence of learning in P2 P market.On the other hand,the marginal increase of investors' returns decreases as they get more and more experienced,displaying a decreasing marginal learning effect.Moreover,this paper discriminates between two learning effects,learning to exit and learning by doing,and demonstrates how P2 P investors learn.There is a negative correlation between investors' revealed ability and attrition likelihood,which shows that some investors learn to exit.When attribution is accounted for,this paper still finds a positive correlation between investors' investing experience and performance,and the learning effect is still decreasing marginally,both as predicted in a learning-by-doing model.After leaving out investors identified as having stopped active trading,the learning effect attenuates by approximately one third compared to the general model in the preceding section.Last but not least,this paper analyzes the paths,or processes,in which P2 P investors take in learning.Specifically,we disentangle the long-term experience effect and short-term feedback effect and investigate into the role they play in investors' learning processes.We show that good recent investing performance impairs future performance,yet it encourages investors to trade more in the future,displaying a short-term overconfidence effect.However,in the long run,trading intensity falls back down to a stable level.Together with the long-run performance improvement evidence of P2 P investors,we believe that rational learning and overconfidence mechanism simultaneously work on P2 P investors.Albeit investors will finally be better off(better performance and less bevioral biases)in the long run as predicted in a rational learning model,short term fluctuations due to overconfidence exist too.Together they generate twists and turns in investors' performance improvement.To conclude,this paper shows that P2 P investors do learn.Short-term overconfidence exists,but will naturally be corrected,most likely by long-term rational learning.Our result shows that individual P2 P investors in China are not as naive and blind as generally considered.They do learn.Both regulators and online lending platforms,instead of indiscriminately treating all investors as reckless fledglings,might as well educate P2 P investors in a more customized and advanced way to make them learn faster and better,so that the online lending market as a whole can be better off.