In the mood for a loan: The causal effect of sentiment on credit origination

We study how loan officers’ mood affects their decisions on mortgage applications. Motivated by psychological evidence, we use three mood proxies: (1) outcomes of key sporting events such as the Super Bowl, (2) outcomes of the American Idol competition, and (3) days around major holidays. Our identification exploits the variation in daily loan approvals in each county, while observing the volume and quality of reviewed applications. Positive sentiment events are associated with a 4.5% higher loan approval rate in affected counties, and negative sentiment events have the opposite effect of a smaller magnitude. The effect is stronger for marginal quality applications, where loan officers have more discretion. The extra loans approved on high-sentiment days experience higher defaults. Overall, our evidence suggests that mood fluctuations affect decisions of financial experts and generate long-lasting real effects.

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