1 July: Friday loans carry particular risks (Image: Clker-Free-Vector-Images, pixabay.com)
According to analysis, excessive interest rates and long-term payment problems are negative effects
Friday is not a good day for investors and borrowers. No other day of the week is worse for these positions, according to Avni Shah from the University of Toronto Scarborough and Xinlong from the Nanyang Technological University.
Monthly and annual endings
Using the US peer-to-peer online lending platform Prosper, the researchers examined data from over five million investment decisions made between November 2005 and mid-October 2008. According to the researchers, loans with higher interest rates were offered on Fridays than on other days.
But it’s not just Fridays: offers on Wednesdays and Thursdays before public holidays marking the end of the working week, such as Thanksgiving, were also associated with higher interest rates than on other Wednesdays or Thursdays.
The researchers observed a similar effect on the last days of the month, regardless of which day of the week they fell on. The greatest risk-taking was observed at the end of the year, with the highest interest rates compared to the last days of the working week or month.
Unreasonable optimism
To investigate the causes of this irrational behaviour, the researchers conducted several experiments. When participants were asked to think about Fridays or the end of the month, they reported that they assessed their financial risks more optimistically than on other days.
As a result, they were willing to take greater financial risks. This can also have consequences for lenders, namely when borrowers miscalculate and are no longer able to repay their loans.
Prosper’s data shows that riskier loans made on the last days of the working week and month ultimately yielded much lower returns than loans made on other days.
‘Our research suggests that these socially constructed temporal markers at the end of a period play an important role and serve as a signal for our decision-making,’ believes Shah.
