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“Beauty Matters in Life and Loans…”

By JLP | December 29, 2010

I’m working my way through Meir Statman’s interesting book, What Investors Really Want: Know What Drives Investor Behavior and Make Smarter Financial Decisions. In chapter three of the book, the author makes the following statement:

Beauty matters in life and loans alike. Beautiful applicants are more likely to get loans and pay lower interest rates than less attractive applicants with the same financial information. Moreover, loans to beautiful loan applicants are bad investments because beautiful borrowers are much less likely to repay their loans than less attractive borrowers. Lenders to beautiful borrowers give up the utilitarian benefits of high interest rates and high likelihoods of being paid because they are fooled by the positive sentiment exuded by beautiful applicants. Or perhaps they are not fooled at all. Perhaps they willingly give up the utilitarian benefits of high interest rates and steady loan repayments for the expressive and emotional benefits of associating themselves with beautiful people.

The author references this paper, which you can download (I have not read the paper).

I thought the paragraph was interesting. Perhaps beautiful people get the benefit of the doubt because they appear to take care of themselves. It’s really no different that the advice we normally hear about dressing your best for a job interview. Employers typically don’t want to hire an “ugly” person even if their credentials are outstanding. Maybe this same thought process carries over into other parts of life. Maybe less-attractive people would do better to do business with QuickenLoan.com where face-to-face contact is not necessary.

Topics: Consumer Debt, Credit | 6 Comments »


6 Responses to ““Beauty Matters in Life and Loans…””

  1. BG Says:
    December 29th, 2010 at 4:16 pm

    “…Moreover, loans to beautiful loan applicants are bad investments because beautiful borrowers are much less likely to repay their loans than less attractive borrowers….”

    What an absurd statement.

  2. JLP Says:
    December 29th, 2010 at 4:38 pm

    I think he made that statement based on the paper he references.

  3. JJF00 Says:
    December 29th, 2010 at 5:07 pm

    I didn’t read the full paper either, so maybe this is addressed, but this doesn’t make a lot of sense to me. I can’t think of any recent loan/credit situation where I actually met the final approver in person for this beauty thing to kick in. It is almost entirely online/phone/fax and occasional time with a broker or escrow officer. Can they tell how great looking I am ;) by my signature?

  4. BG Says:
    December 29th, 2010 at 5:07 pm

    I think I’ve found the problem in the underlying data: 83% of the photo-raters were between 18-21, and 72% of them were female.

    My guess is that these people (young ladies) tended to rate other young people as ‘beautiful’, who are bad credit-risks (overall) than older people who they likely rated as ‘not-so beautiful’.

    I bet if they got a bunch of 40 year-olds to rate the photos for beauty/credit-worthiness the same conclusions wouldn’t be drawn.

    In a nutshell: young females are not good at rating others (*shock*).

  5. BG Says:
    December 29th, 2010 at 5:08 pm

    #3 JJF00) the data is all from Prosper.com (online peer to peer lending). Apparently the would-be borrowers have an option to upload a photo…

  6. Stacey Says:
    December 29th, 2010 at 9:19 pm

    Perhaps the pool using Prosper.com isn’t representative either…my first thought is that they are younger than the median age of the population (i.e. tech-savvy=youth) and perhaps wouldn’t necessarily be a good credit risk anyway as they are just starting out and have to (or already have)made their mistakes.

    And NO, I’m not even going to mention the student loans they might have ;)

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