Platform Mispricing and Lender Learning in Peer-to-Peer Lending

We document how online lenders exploit a flawed, new pricing mechanism in a peer-to-peer lending platform: Prosper.com. Switching from auctions to a posted-price mechanism in December 2010, Prosper assigned loan listings with different estimated loss rates into seven distinctive rating grades and adopted a single price for all listings with the same rating grade. We show that lenders adjusted their investment portfolios towards listings at the low end of the risk spectrum of each Prosper rating grade. We find heterogeneity in the speed of adjustment by lender experience, investment size, and diversification strategies. It took about 16–17 months for an average lender to take full advantage of the “cherry-picking” opportunity under the single-price regime, which is roughly when Prosper switched to a more flexible pricing mechanism.