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Introduction
Previous literature reviews on lending decision making in banks have focused on different parts of the lending process, such as the effects of credit scoring ([38] Hand and Henley, 1997), the effects of relationship lending ([18] Boot, 2000) and the presence of intangibles in lending decision making ([25] Cañibano et al. , 2000). Only two reviews have focused on studies exclusively concerned with loan officers and individual lending decision making ([5] Andersson, 2000; [62] Maines, 1995). To a lesser extent, reviews have included organizational factors. This raises the question of how the individual and the organizational contexts of the bank interact in lending decision making. The aim of this study is to review and merge the recent literature regarding lending decision making at the individual level with recent literature on organizational and system level decision making. The goal is to better understand how they relate and interact.
The structure of the paper is the following. First, we present a short introduction to the research on human decision making relevant for lending. Second, we describe the different lending technologies used by banks. Third, we present the research on lending decision making before 2000 and some of the main problems in lending decision making. Fourth, we review the last ten years of the bank lending literature. Finally, we draw conclusions based on the analysis, state the limitations of our review, and suggest some areas for future research.
The role of the individual and the situation in decision making
The influential work on heuristics and biases ([81] Tversky and Kahneman, 1974) and prospect theory ([53] Kahneman and Tversky, 1979) showed that human decision makers sometimes make a number of cognitive errors when making decisions. These errors include being too risk averse and overstating small probabilities ([54] Kahneman et al. , 1982). This work and its focus on the human flaws in decision making were questioned in the naturalistic decision making paradigm (NDM) ([57] Klein, 2008; see also [33] Gigerenzer, 2007). When research in the heuristic and bias paradigm (HBP) pointed to the weaknesses in making decisions using little cognitive effort (i.e. heuristics), NDM research showed that in real life situations such cognitive processes yielded valid results ([57] Klein, 2008). Recently, similar cognitive processes have been investigated...