Loan decisions made in the early afternoon are more likely to be rejected

Bank credit officers are more likely to make negative loan decisions after lunch due to decision fatigue, affecting around $500,000 in potential repayments.

New research from Cambridge University shows that bank credit officers are more likely to make negative loan decisions in the early afternoon.

Likewise, “decision fatigue” around midday is associated with defaulting to the safer option of saying no.

The study appeared on May 5 in the journal Royal Society Open Science.

Decision fatigue is the tiredness caused by having to make difficult decisions over a long period.

Previous studies have shown that people suffering from decision fatigue tend to fall back on the “default decision”: choosing whatever option is easier or seems safer.

“Decision fatigue” means more negative loan decisions after lunch

The researchers looked at the decisions made on 26,501 credit loan applications by 30 credit officers of a major bank, over one month.

Specifically, the officers were making decisions on “restructuring requests.”

That term refers to when the customer already has a loan, but is having difficulties paying it back, and thus asks the bank to adjust the repayment amounts.

By studying decisions made at a bank, the researchers were able to calculate the economic cost of decision fatigue.

They found the bank could have collected around an extra $500,000 in loan repayments if all decisions had been made in the early morning or late afternoon.

“Credit officers were more willing to make the difficult decision of granting a customer more lenient loan repayment terms in the morning, but by midday, they showed decision fatigue and were less likely to agree to a loan restructuring request,” said co-author Simone Schnall.

“After lunchtime, they probably felt more refreshed, and were able to make better decisions again,” Schnall said.

Negative loan decisions are less cognitively demanding

Decisions on loan restructuring requests are cognitively demanding.

Credit officers have to weigh up the financial strength of the customer against risk factors that reduce the likelihood of repayment.

And errors in either direction (too lenient or too stern) can be costly to the bank.

Of course, approving the request results in a loss relative to the original payment plan.

But if the restructuring succeeds, the loss is significantly smaller than if the loan is not repaid at all.

The study found that customers whose restructuring requests were approved were more likely to repay their loan than if they were instructed to stick to the original repayment terms.

And that is why the tendency to decline more requests around lunchtime was associated with a financial loss for the bank.

“Even decisions we might assume are very objective and driven by specific financial considerations are influenced by psychological factors,” said co-author Tobias Baer.

The default decision is sometimes better

In some contexts, making default decisions may be the better choice.

The paper mentions studies showing that in the case of parole decisions, antibiotic prescriptions, and some decision-making in healthcare, erring on the side of caution might be beneficial.

Similarly, given the high financial stakes for credit loan approvals, “being on the safe side” and therefore rejecting a request might be the preferred course of action.

But this paper shows that in the case of restructuring requests, decision fatigue was associated with negative outcomes.

In fact, the authors write, “the financial loss of decision fatigue was more than 9 times the average monthly salary of individual credit officers.”

This suggests that in the banking sector and possibly others, the economic costs of cognitive depletion can be substantial.

Furthermore, this study only examined one month of decisions, and the financial loss may be greatly amplified over the long run.

Regular breaks make a big difference

“This is clear evidence that regular breaks during working hours are important for maintaining high levels of performance,” Baer said.

This practice is consistent with past research showing that “mental fatigue and physical fatigue share a common physiological substrate.”

The study also refers to a recent meta-analysis suggesting that self-control is a skill that can be improved by training, which might have relevance to the workplace.

Modern work patterns are characterized by longer working hours and higher work volume, the study says.

These results suggest that cutting down on prolonged periods of intensive mental exertion may make workers more productive.

More sleep and psychology news:

Study: “Quantifying the Cost of Decision Fatigue: Suboptimal Risk Decisions in Finance”
Authors: Tobias Baer and Simone Schnall
Published in: Royal Society Open Science
Publication date: May 5, 2021
DOI: 10.1098/rsos.201059
Image: Tima Miroshnichenko from Pexels