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How mental shortcuts guide loan success and repayment
• 6 mins read
Using no-brainer approaches is normal in daily routines, but adding a little bit of thought could go a long way in personal finance
A good decision requires critical thinking and time but many of us don’t have enough privilege or patience to ponder sometimes. To illustrate, if you ever bought a sale product right after seeing its before-discount price, then you have carried out a fun heuristic exercise or mental shortcut.
Heuristic refers to a mental process when individuals seek to reduce complex tasks to simpler operations to process information with less effort. Although the results may not be optimal, heuristics can be good enough when solving problems with limited timeframes in routine minutiae.
In peer-to-peer lending platforms, this pragmatic method is not uncommon among borrowers. The most conventional one is using round numbers. This is not surprising as when dealing with precise numbers like 29 or 15.15, people tend to round it up or down to get simple figures. Putting round numbers requires less thinking and is associated with feeling-based decision-making.
“Consequently, the use of round numbers may lead to suboptimal decisions,” says Michael Zhang, Wei Lun Professor of Business Artificial Intelligence at the Department of Decisions, Operations and Technology at the Chinese University of Hong Kong (CUHK) Business School. “When using the round-number heuristic, decision-makers may sacrifice accuracy for convenience.”
In a study titled Numerological heuristics and credit risk in peer-to-peer lending, Professor Zhang, along with Maggie Hu of the City University of New York, Li Xiaoyang of the Hong Kong Polytechnic University, and Shi Yang of Deakin University, found that loan applications on Chinese lending platform using round amounts have lower success rates and are more likely to be overdue.
Heuristic often mingles with superstition. A notable example in China is applying for loans by incorporating number eight as the word sounds like “wealth”, and surprisingly, loans incorporating this lucky number are more likely to get funded and have lower delinquency rates. “Borrowers who use lucky numbers make more effort to understand the lenders’ preferences and make their loan applications more attractive,” he adds.
As digital finance grows, lending platforms are likely to integrate behavioural data into their artificial intelligence-driven risk assessment tools. Professor Zhang suggests platforms leverage the study by tailoring loan recommendations based on users’ financial behaviour and heuristic tendencies.
“By identifying borrowers’ tendencies to use heuristics like round or lucky numbers, businesses can segment their customers into different risk profiles.”
Professor Michael Zhang
Finding the right mental shortcut
The researchers gathered data from a leading Chinese peer-to-peer lending platform from October 2010 to January 2016. Before submitting a loan application, borrowers must register and provide information on their gender, age, education, and income. A registered borrower can submit loans in multiples of 50 Chinese yuan (US$7.62), ranging from 1,000 to 3 million Chinese yuan, and the lenders will decide whether to bid or not.
The researchers obtained a sample of 611,079 successful loans, with 64.85 per cent of them using round numbers like 1,000, 5,000, 10,000 and the like. Only 9.45 per cent used lucky numbers containing the number eight, such as 8,000, 28,000, or 88,000, etc., but not number four as it sounds similar to “death” in Chinese.
The analyses show that round-number loans have a 73.79 per cent lower chance and take 1.05 hours longer to get funded with a 6.37 per cent higher chance of being overdue than non-round numbers. Conversely, loans with lucky numbers are 42.12 per cent more likely to be funded and spend 0.19 hours less on bidding time with a 1.80 per cent lower delinquency rate. For borrowers who have never used round and lucky numbers, adopting round numbers would drop the chance of securing loans by 66.73 per cent, but lucky numbers would raise their odds by 69.47 per cent.
To test the repayment performance, the researchers used 5,948,938 monthly repayment records from 217,237 funded loans. The results confirmed that borrowers with round numbers have lower funding success rates and higher delinquency, but those with lucky numbers have the opposite results. Borrowers who resort to round numbers are also more likely to experience difficulties in budgeting or make negligent mistakes when repaying the loans.
Implication for fintech businesses
Professor Zhang highlights the importance of peer-to-peer lending platforms in understanding user behaviour. Platforms can create loan packages or promotional campaigns that align with user preferences as superstitious borrowers may be more responsive to offers incorporating the number eight or avoiding the number four, especially in cultures where these numbers have significant meanings.
Financial technology or fintech firms can incorporate user preferences into marketing strategies to strengthen customer engagement and trust. They can also offer more personalised tools, educational content, or artificial intelligence-powered suggestions for borrowers submitting round-number loans, which may indicate less financial planning.
“By identifying borrowers’ tendencies to use heuristics like round or lucky numbers, businesses can segment their customers into different risk profiles,” says Professor Zhang. “This segmentation could guide marketing efforts, such as offering lower interest rates or faster approval processes for borrowers using lucky numbers, who are more likely to repay loans on time.”
The study could also help lenders enhance risk assessment models by incorporating heuristic preferences as indicators of creditworthiness. Stricter underwriting criteria (e.g., additional income verification) may be applied for loan applications with round numbers to mitigate potential risks. On the other hand, lenders can prioritise applications with lucky numbers for faster approval or offer preferential terms, as these borrowers are more likely to repay on time.
“By incorporating heuristic usage data into machine learning algorithms for loan performance predictions, this additional layer of information can improve the accuracy of delinquency forecasting and help lenders allocate resources more effectively,” he adds.
Forecasting the future
Professor Zhang sees that traditional credit scoring models may evolve to incorporate non-financial indicators, including heuristic-driven behaviours, as proxies for financial responsibility or sophistication. “As alternative lending models expand globally, platforms will need to adapt their practices to local cultural contexts, leveraging insights like superstitious number preferences or other decision-making heuristics.”
Furthermore, platforms could gamify loan application processes and encourage borrowers to move away from mental shortcuts by offering rewards for more precise financial planning. For regulators, fintech platforms may be required to disclose how heuristic-driven behaviours influence lending decisions, ensuring transparency in how borrowers are assessed and treated.
Considering cultural and contextual differences, Professor Zhang believes that the findings can likely be applied to other forms of crowdfunding. Given the influence of numerology is strong in some Asian markets like China and Japan but less prevalent in Western countries, other types of heuristics may play a more prominent role. Crowdfunding platforms should adjust their strategies based on local norms.
“While the specific numerological preferences may vary, the broader principle—heuristics influence decision-making—can be generalised across different cultural and economic contexts,” he adds. “Platforms worldwide can use these insights to better understand user behaviour and improve decision-making frameworks.”
