Using a randomized experiment in the auto lending industry, we provide causal evidence of higher loan profitability with algorithmic machine underwriting, relative to human underwriting. Machine-underwritten loans generate 10.2% higher loan-level profit than human-underwritten loans in a sample of 140,000 randomly assigned applications. Comparing loans to otherwise identical borrowers, the loans underwritten by machines not only have higher interest rates, but also realize a 6.8% lower incidence of default, relative to loans underwritten by humans. The performance gap is more pronounced with more complex loans and at discrete cutoffs. These results are consistent with findings on the human's limited capacity for analyzing complex problems and with agency conflicts in the underwriting process.
Mark Jansen is an Assistant Professor of Finance. His primary research and teaching interests are in entrepreneurial finance, household finance, and corporate finance. Prior to joining the University of Utah, Dr. Jansen worked in private equity as managing director at Holland Park Capital and was responsible for strategy and investor relations. In this capacity, Dr. Jansen was a member of the Young President’s Organization. Prior to this Dr. Jansen worked in management consulting and in the chemical Industry. He received a Ph.D. in finance from the University of Texas at Austin, an M.B.A. from London Business School and a dual B.S. in management science and mechanical engineering from the Massachusetts Institute of Technology.