P2P Money Blog

P2P Online Auctions: Waiting for the hammer to fall

Last week, FundingKnight saw its first loan auctions go live. Whilst we’d run test loans at fixed interest rates, this was the first time we’d given lenders a chance to bid to participate in an auction whilst choosing how much (from £25 upwards) and at what rate they wish to lend.

We’ve been looking forward to the launch of our live peer to business lending auctions. Auction models are generally considered to provide the best chance of generating value for both sides of the lending equation – the lender or investor and the borrowing or business that’s seeking finance.

Once the first bids had been successfully placed and we’d breathed a sigh of relief, it got me wondering about the whole psychology of auctions.

I’ve read many blogs, including this one by Seth Godin, about the irrationality of auctions.  The key points made usually go pretty much as follows:

• Although it’s possible to set a maximum bid and walk away when bidding on an item on ebay most people don’t do that…
• Instead they leave participation until the last moment and enter a bidding war with other buyers which has the potential to get increasingly ridiculous as buyers become attached to the idea of ‘winning’ the auction and owning the item they probably already think of as belonging to them.
• Once they’ve won the auction they often sink into buyers remorse, thinking they’ve overpaid and wondering every other bidder managed to restrain themselves and drop out leaving them to pay over the odds for something they might not even want all that much anyway…

As Godin writes,

“A friend of mine spent almost a thousand dollars on a piece of furniture worth $20 using this tortured logic. Human beings are quite willing to repeatedly spend small amounts of money to avoid losing something they they think already belongs to them.”

So what does all this mean for peer to peer / peer to business lending?

Whilst the auction is a reverse auction – as more and more lenders bid, the rate the borrowers pays goes down – there must be a similar mentality at play, surely?

As luck would have it, I’m not the first to ask these questions. Several academic studies have already been run, such as this one that investigates Herding Behaviour in Online P2P Lending

The author’s set out to study lenders’ behavior in online P2P exchanges, investigating nine hypotheses, listed below.

To find out if they were right – and perhaps look a little deeper inside your own peer to peer lending mind – you can read the full report.  Alternatively, watch out for my summary coming later this week on the FundingKnight blog.

Hypotheses:

• An auction with a higher participation rate attracts more bids.
• There is a diminishing marginal effect of the participation rate.
• Participation rate being equal, a newer auction attracts more bids.
• An auction with more postings on the Q&A board attracts more bids.
• An auction with more verified certification attracts more bids.
• An auction with a higher starting interest rate attracts more bids.
• An auction with a shorter payback period attracts more bids
• An auction posted by a borrower with a history of more successfully funded auctions attracts more bids.
• An auction posted by a borrower with a history of fewer failed auctions attracts more bids.

This post was written by Hazel McHugh who works for FundingKnight, a new peer to business lender who arrange crowdlending for businesses. It’s free to register for peer to business lending at www.fundingknight.com and you can start lending with just £25, fee free for lenders.