How costly are cultural biases?

  • We estimate the cost of cultural biases in high-stake economic decisions by comparing agents’ peer-to-peer lending choices with those the same agents make under the assistance of an automated robo-advisor. We first confirm substantial in-group vs. out-group and stereotypical discrimination, which are stronger for lenders who reside where historical cultural biases are higher. We then exploit our unique setting to document that cultural biases are costly: agents face 8% higher default rates on favored-group borrowers when unassisted. The returns they earn on favored groups increase by 7.3 percentage points when assisted. The high riskiness of the marginal borrowers from favorite groups largely explains the bad performance of culturally-biased choices. Because varying economic incentives do not reduce agents’ biases, inaccurate statistical discrimination—unconscious biased beliefs about borrowers’ quality—can explain our results better than taste-based discrimination.

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Author:Francesco D'AcuntoORCiDGND, Pulak GhoshORCiDGND, Rajiv Jain, Alberto G. RossiGND
Parent Title (English):LawFin working paper ; No. 34
Series (Serial Number):LawFin Working Paper (34)
Publisher:Center for Advanced Studies on the Foundations of Law and Finance, House of Finance, Goethe University
Place of publication:Frankfurt am Main
Document Type:Working Paper
Year of Completion:2022
Year of first Publication:2022
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2022/07/12
Tag:Biased Beliefs; Caste; Cultural Norms; Discrimination; Inter-ethnic Conflict; Religion; Robo-Advising; Social Capital; Social Conditioning; Trust
Issue:This version: June 2022
Page Number:63
The paper benefited significantly from a fellow visit of Francesco D’Acunto at the Center for Advanced Studies on the Foundations of Law and Finance funded by the German Research Foundation (Deutsche Forschungsgemeinschaft, DFG)–project FOR 2774.
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE)
Wissenschaftliche Zentren und koordinierte Programme / DFG-Forschergruppen / Foundation of Law and Finance
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
3 Sozialwissenschaften / 34 Recht / 340 Recht
Licence (German):License LogoDeutsches Urheberrecht