Do Behavioral Biases Affect Credit Risk Assessment Methods?

Document Type : Research Paper

Authors

1 Finance and Accounting Methods, IHEC, University of Sfax, Tunisia

2 Finance and Accounting Methods, Faculty of Economic Sciences and Management, University of Sousse, Sousse, Tunisia

Abstract

The purpose of this study was to investigate the effect of bankers’ behavioral biases on credit risk management. We examined whether and how individual emotional biases (i.e., loss aversion, optimism, overconfidence, and cognitive dissonance) affect the banks’ credit risk policy, including the risk assessment methods (i.e., quantitative vs. qualitative methods). Based on a sample of Tunisian banks, the results showed that the bankers’ emotional biases affect their preferences regarding the choice of credit risk assessment methods. The findings revealed that optimist, loss-averse, and overconfident bankers are more likely to adopt quantitative methods such as scoring when they assess the credit risk. The bankers with high cognitive dissonance, however, were found to have a high preference for a qualitative approach.

Keywords

Main Subjects

References

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Interdisciplinary Journal of Management Studies (Formerly known as Iranian Journal of Management Studies)
Volume 16, Issue 2
April 2023
Pages 501-514

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