Similarity bias in credit decisions for entrepreneurs on the brink of bankruptcy

Abstract

For entrepreneurs in financial distress, it is of vital importance that investors and bankers accurately assess the viability of their business, free of unwanted biases that bear no relevance to the assessment of the chance of survival. Despite the prevalence of entrepreneurs facing financial distress, little research has yet investigated the role of cognitive biases in funding decisions in this important context. The current research attends to this issue and investigated whether entrepreneurs who are perceived by a banker as more similar are more likely to receive capital to save their business from bankruptcy than entrepreneurs who are perceived as less similar to the banker. Additionally, we investigated whether similarity bias affected bankers' attributions of what caused the financial distress as well as their perceptions of entrepreneurs' trustworthiness. Using an experimental research design, we found a similarity bias in bankers' causal attributions and trustworthiness judgments, but not in their credit decisions. We contrast our findings with similarity bias research among equity investors and discuss the implications for theory and practice.

Banks' risk taking in credit decisions: influences of loan officers' personality traits and financial risk preference versus bank-contextual factors

“…Several studies have shown heterogeneity in how loan officers evaluate loan applications despite that banks have developed lending guidelines to counteract this (Bruns et al, 2008). For example, research shows that loan officers tend to favor clients who have similar person characteristics as themselves (Hensman and Sadler-Smith, 2011;Strohmaier et al, 2021) and that they are not in agreement in their risk assessments even if employed by the same bank (Andersson, 2004). To what extent this variation in credit decisions depends on bank-contextual factors or loan officers' personal financial risk preference and personality traits has not been extensively investigated in previous research.…”