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The Psychology Of Borrowing: Emotional Factors In Student Loan Decision-making

The Psychology Of Borrowing: Emotional Factors In Student Loan Decision-making

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Department of Information and Computing, School of Technology and Education, National University of Mongolia, Ikh surguuliin gudamj 3, Sukhbaatar District, P.O. Box-46A/600, Ulaanbaatar 14201, Mongolia

Department of Physics, School of Arts and Sciences, National University of Mongolia, Ikh surguuliin gudamj 1, Sukhbaatar District, P.O. Box-46A/600, Ulaanbaatar 14201, Mongolia

Received: 4 February 2021 / Revised: 17 March 2021 / Accepted: 26 March 2021 / Published: 5 April 2021

The Psychology Of Borrowing: Emotional Factors In Student Loan Decision-making

This paper determined the antecedents of debt repayment based on cognitive and behavioral economic theories. The purpose of this study is to know if the credit risk of an individual can be predicted based on psychological tests that measure aspects of psychological factors such as the effectiveness of economic decision-making, self-control, overthinking, selflessness and giving in, neuroticism, and attitude toward money. In addition, we compared psychological symptoms to financial symptoms, with different age and gender groups, to assess whether the former can predict default expectations. This study covered the psychological test results, financial information, and default information of 1118 borrowers from telephone credit applications. We validated the questionnaire using confirmatory factor analysis (CFA) and achieved a Cronbach’s alpha reliability coefficient greater than 0.90 (α = 0.937). We used the empirical data to build predictive models using logistic regression. Logistic regression was used to estimate the parameters of the logistic model. The outcome indicates that the positive results from the psychological tests of effective financial decision-making, self-control, conscientiousness, self-discipline, and the idea of ​​giving, as well as thinking about the money that people can afford individual access to credit. On the other hand, one of the variables—neuroticism—was rated as low. Finally, the model only uses psychometric variables that have been shown to be highly predictive of default, and the psychometric variables and cognitive score offer the best predictive abilities.

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Behavioral economics; psychological factors; determinants; the human mind; psychological analysis; economic conditions; credit risk; the borrower; the debtor; personality; debt settlement; the debt

In practice, most financial institutions base their loans on the financial and personal characteristics of their customers without considering personal characteristics. According to the interactional perspective in psychology, human behavior is not only explained by the situational and economic factors but also the needs and characteristics of the person. In this way, it can be seen that the characteristics of the individual can be the main indicator of the debt payment behavior of the individual [1].

A psychological method based on psychological factors can identify the debt repayment behavior of microloan service customers. All over the world, FinTech companies and other financial service providers are experimenting with and developing the technology of intelligent accounting systems. These psychological tests that understand the financial behavior of individuals are implemented in 50 countries worldwide, and are able to predict the financial decisions of individuals with 91% accuracy [2 ]. The benefit of this development is greater access to the loan service for those who are able to pay their debts but do not have a previous credit score and have limited ability to obtain credit. This development will greatly influence the reduction of poverty by providing financial loans to billions of people who cannot get loans due to poor financial conditions and lack of credit history.

Commercial banks and non-financial financial organizations of Mongolia have determined the status of individuals based on limited resources such as personal income and credit history [3]. On the other hand, from the first quarter of 2019, the total number of non-performing loans reached 89.1 billion MNT, or 9.1% of the bank account [4], which shows the lack of result of the traditional credit assessment method, ie. based on the resources of the individual for the purpose of the loan, without being able to prevent the problems of bad credit. Most of the working age population in Mongolia cannot get loans from banks and non-bank financial institutions (NBFIs) because they are considered credit ineligible due to low income and no credit history, bond or social insurance. pay. Out of every 10 paid adults in Mongolia, 1 has a high salary level, 3 are in the low-income category, or can show their credit for banking and financial services, and six people are in the cheapest class. and cannot provide documentary evidence of credit services [5]. We believe that the use of psychological credit scores will increase the number of low-income but reliable customers.

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Research in this area has not yet been conducted in Mongolia. International studies show that economic and demographic indicators are widely used to predict debt payments. In the last decade, not only economic and demographic factors, but also psychological factors related to personal characteristics, attitudes, and behaviors have also been identified as predictors of payment behavior. in research related to credit [1].

In 2006, the Entrepreneurial Finance Lab (EFL, Massachusetts Avenue, Cambridge, Massachusetts 01238 USA) of Harvard University studied for the first time the possibility of using psychological methods for credit scoring in work [6]. EFL developed a psychological method for borrower assessment under the three categories of personality, mental ability, and fairness [7]. The method developed by the EFL of Harvard focused on the characteristics of the person and the physical characteristics and used them to develop an assessment method based on the concepts of individual psychology.

This study considers six psychological factors, which have been identified in the literature and theoretical studies, as influencing purchasing behavior: financial decision-making effectiveness, self-control, conscientiousness, apathy and kindness, and neuroticism. These psychological aspects are explained in the project background section.

The Psychology Of Borrowing: Emotional Factors In Student Loan Decision-making

To choose the indicators, we relied on some of the following articles and theories. The findings of previous studies [1] showed that “Right Decision Making” is a prominent characteristic of frequent payers, while “Irrelevant decision making” is seen as a characteristic of irregular payers. According to Daniel Kahneman and Amos Tversky, the founders of behavioral economics, the right decision can make a profitable decision [8]. Mahfuzur Rahman et al. (2020) found that self-control is important in avoiding debt [9]. In addition, conscientiousness is a protective factor in high-risk credit behavior and is associated with lower levels of unsecured credit [10]. The phenomenon of “attitude to money” was studied by Russian researchers, and in their research model they included an analysis of psychological, personal, and social factors. people, of society determine how strongly they feel about money, according to different scales. set in order. Then, the relationship between social attitudes and money and the economic performance of individuals is shown [11]. In a study on the socio-psychological characteristics and level of financial education of Russian borrowers, Nyhus and Webley (2001) found that psychological instability and neuroticism were good predictors of number [12].

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The aim of this study is to determine the personality and psychological factors related to debt repayment behavior and compare it with financial indicators, and it is hoped that the study will contribute and help to fill location of documents. In addition, the findings of this study are necessary to find a psychological assessment related to pay specific to Mongolian culture, this study is important. To achieve this goal, we

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