Lending money, ensuring regular interest payments and the eventual return of your principle on time is the dream of any P2P investor. However, first-time lenders on P2P platforms need to be aware of the blindness that comes from expecting things to happen accordingly to plan. Avoid significant risk and losses by being aware of this common investment bias, inspired by Nassim Nicholas Taleb book, The Black Swan.
The Confirmation Bias
We as humans are prone to draw conclusions from what we have seen in the past in order to project how the future will be. In P2P lending, it is quite easy to think that a new platform, similar to another one you used and where your past investments were successful, will present the same type of performance as your past experience shows. This is a grave mistake… “Past performance is no guarantee of future results“. Don’t let your confirmation bias blind your critical analysis of the particular economic moment and risks that can impact your P2P investments.
The Narrative Fallacy
The Kuetzal & Envestio frauds in the beginning of 2020 created a powerful narrative that has been growing over time, with additional platforms joining the scam ranks. A platform scam story offers us deep, affecting reasons on which to hang our understanding of the entire P2P market reality. These stories can lead us to believe we can predict the future… The problem is, most of the P2P platforms are not fraudulent. “But a story sticks… market statistics do not“.
We Don’t Want Bad Things to Happen
None of the investors affected by P2P platform frauds expected to become victims. We are bias against bad outcomes, since we always project that bad things don’t happen to us. We need to proceed with careful analysis of the investment data, always looking for aspects that show lack of adherence to reality and can prove that something bad is going to happen. We need to find the right balance between our expectations versus the hard reality we need to face.
The Distortion of Silence Evidence
We only learn about the success stories, not the ones of losses. We have a natural tendency to view historical evidence with a filter that selects “the rosier part of the process” while ignoring the parts of the process that don’t fit our preconceptions, or at least not recognizing or forgetting that there is a part of the historical process that is inaccessible to us and therefore, silent. Some influential P2P bloggers took the decision to erase their losses associated to recent frauds, so they could keep a brilliant narrative that silences problems and increase investments risks for new investors. Be careful.
Always assume you don’t know anything about the P2P platform you will invest in. Forget all you read and learned from others. Explore each investment option as the only one you will perform during your entire life. It is hard, and requires a tremendous amount of work. That is natural, since what you know is only a small element of the true. We, as investors, expect P2P platforms to adhere to a common information structure capable of providing visibility over future performance. This tunneling perspective is the reason for growing pains in the future of your investments.
I wouldn’t be investing in P2P loans unless I thought it’s a simple, viable and profitable asset class, with a great future ahead. In any case, I’m critically aware of the industry risks, frauds and lack of regulation that make almost impossible to any institutional investor to add this assets into their portfolios. Only with a constant vigilance and investment diligence, following a work ethic far from the passive storytelling the entire industry is sharing, you will be able to avoid the investment bias that can put your capital at risk.