UD's Michal Herzenstein discusses how a person's writing style may be an indicator of how likely they are to repay loans.

Lending risk and language

Industry experts share risk management research at UD conference

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2:48 p.m., Feb. 27, 2015--Your writing style may be an indicator of how likely you are to repay loans, according to new research by the University of Delaware’s Michal Herzenstein.

Herzenstein, associate professor of marketing, presented her research last week during the third annual conference hosted by UD’s Institute for Financial Services Analytics (IFSA) and JPMorgan Chase & Co.

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Herzenstein and her team analyzed thousands of written descriptions from Prosper, a peer-to-peer lending website that allows users to loan money to borrowers who post descriptions of themselves and their goals online. The researchers discovered patterns that predict the likelihood that someone will repay a loan.

Those who default on loans, for example, are more likely to write with low complexity, a high word count and lots of social language (using “we” instead of “I”). 

However, borrowers who wrote about having strong morals were less likely to default.

“Different types of people have different relationships with words,” Herzenstein explained. “People who are different in essence will describe the same effect differently.”

Herzenstein’s calculations, she says, could have saved lenders up to $3.44 million if they had they used her data to improve their lending decisions.

Andrea Everard, IFSA conference attendee and UD associate professor of MIS, called Herzenstein's research a “relevant and amazing application of how data analytics can be used to make decisions.”

“Often ‘big data’ is such a buzzword but you rarely get the idea of how it’s going to be applicable,” Everard continued. “I can bring a lot of this material back to class.”

Everard also found information from another IFSA presenter, Charles Campbell Palmer of IBM Research, to be both useful and relevant.

From Palmer’s presentation, Everard said she took that, “You can have the best coders, the best programmers and the highest level technology, but what’s going to make the difference are the people behind the computers.”

Palmer’s presentation explored how cognitive computing affects cybersecurity, citing recent developments in IBM’s Watson project.

The IBM researcher noted that although the Watson project is still in its test stages, its cognitive computing abilities are being applied to complex work like pharmaceutical research.

“It’s exploring areas that we haven’t even considered exploring,” Palmer said, adding that cognitive computing is really about “connections and understanding.”

Conference attendee David F. Lyons Jr., risk management adviser for Lyons Companies, said that it was enlightening to hear from an expert who actively works in the field of cybersecurity.

“It’s really exciting to see where that’ll be five years or 10 years down the road,” Lyons said.

Palmer noted that both legitimate companies and the “bad guys” are improving their technology rapidly, and being able to continually evolve is necessary.

Lyons agreed, saying, “It’s important to know that things will continue to change. Every day there’s a new challenge.”

The day-long conference also featured Jialan Wang from the Office of Research at the Consumer Financial Protection Bureau. Her research focused on how changes in credit cards’ minimum payment requirements affect consumers.

Wang called minimum credit card payment requirements “a nudge” from banks, which she said some consumers might interpret as the appropriate amount to pay.

“Does seeing a smaller requirement on your statement induce you to pay less of your debt?” was a key question Wang and her team tried to answer.

They studied large economic data sets and found that changes in bank policy can lead to a number of “unintended consequences.”

For example, companies raising required payments may cause some borrowers to pay more, but delinquency rates may increase as some cannot make the higher payments. Wang said that suggested payment rates might serve as an alternative tool that banks can use without increasing delinquency.

Speaking from the perspective of the credit industry itself was IFSA conference speaker Lana Song of JPMorgan Chase, who gave an overview of risk management in the credit card industry.

“Credit card companies need to manage the risk that can occur at all points of contact with the customer,” Song said. This makes risk management “critical” to the industry.

Song noted that data analytics that are predictive of client behavior are very helpful, because credit companies must make a number of potentially risky account management decisions like credit line increases, collection strategies and more.

Song said that these analytics, including different types of credit scores, have an important impact on the “day-to-day” business of her field.

One of the IFSA conference’s student attendees, Eriselda Danaj, said that hosting industry experts and discussing research helps and her classmates to see real applications of what they are learning.

“You see that your dissertation actually can be applied in reality,” commented Danaj, who is part of the first cohort of students to participate in UD’s new doctoral program in financial services analytics (FSAN).

Danaj called the sharing of critical information between industry and academia “the best part of the program.”

“Not having information can prevent development, and I don’t think that any of these universities or industries are interested in being left behind,” Danaj said. “The sooner we understand the importance of collaboration and cooperation, the better.” 

Panel discussion

The IFSA conference ended with a panel discussion on how data analytics can be used for social good, a field of growing interest in the business community.

The panel discussion featured Mischa Byruck, formerly of DataKind; Andrew Means of the University of Chicago’s Impact Lab; Perry Yeatman of Mission Measurement and David Stephens of the Poverty Museum.

“From measuring poverty to predicting social impact, data is playing an increasingly important role” in the nonprofit sector, said Byruck.

Stephens agreed, saying that data could help solve the social sector’s “information problem.”

“The fundamental flaw in the social sector is that there doesn’t exist a standard, transparent and meaningful way to identify what’s working,” Stephens said. “Data and data science can help bring information transparency to the social marketplace. This will create a fundamental shift in the sector.”

Byruck called these shifts part of the nonprofit sector’s “data moment,” as technology becomes more available and partnerships are made across disciplines. However, he said, this growth brings with it a range of complex ethical and logistical questions.

“What are the ethical implications around privacy in data collected by nonprofits of vulnerable populations?” Byruck asked. “What happens if our overreliance on digital data excludes those without access to digital technologies?”

These questions, as well as questions from the audience, were considered during the panel discussion.

Everard called the discussion “fascinating,” saying that it “shed a light on the gap between industry and academia.”

“These types of conferences enable partnerships between industry, academia, profit and not-for-profit,” Everard continued. “It is a unique opportunity to be exposed to innovation and development in a special context – in this case, the social arena.”

Article by Sunny Rosen

Photos by Kathy F. Atkinson

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