This paper investigates rational herding in microloan markets, focusing on Prosper.com, the largest microloan market in the United States. The study uses a unique panel dataset of Prosper listings from 2006 to 2008 to analyze how lenders make decisions based on peer behavior. The findings reveal evidence of rational herding, where lenders use observational learning to infer the creditworthiness of borrowers by observing peer lending decisions and using publicly available borrower characteristics to adjust their inferences. Unlike irrational herding, where lenders simply mimic others, rational herding involves active learning and Bayesian inference. The study finds that well-funded listings tend to attract more funding, even after controlling for unobserved listing heterogeneity and payoff externalities. Moreover, lenders use publicly observable borrower characteristics to moderate their inferences about creditworthiness. For example, obvious defects like poor credit grades amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Conversely, favorable characteristics like friend endorsements weaken the herding effect, as lenders attribute herding to these observable merits. The paper also shows that rational herding is more effective in predicting loan performance than irrational herding. The study uses a variety of identification strategies, including panel data analysis and dynamic Generalized Method of Moments (GMM), to confirm the existence of rational herding. The results suggest that lenders are more likely to make rational inferences about borrower creditworthiness when they have access to publicly available information. The study contributes to the literature on herding by highlighting the distinction between irrational and rational herding. It shows that lenders on Prosper, a peer-to-peer lending platform, may have the motivation and opportunity to make more rational decisions. The findings have important implications for borrowers and lenders, as they suggest that borrowers can increase their chances of funding success by seeking friend endorsements and joining Prosper groups. The study also provides insights into the mechanisms underlying herding behavior in microloan markets.This paper investigates rational herding in microloan markets, focusing on Prosper.com, the largest microloan market in the United States. The study uses a unique panel dataset of Prosper listings from 2006 to 2008 to analyze how lenders make decisions based on peer behavior. The findings reveal evidence of rational herding, where lenders use observational learning to infer the creditworthiness of borrowers by observing peer lending decisions and using publicly available borrower characteristics to adjust their inferences. Unlike irrational herding, where lenders simply mimic others, rational herding involves active learning and Bayesian inference. The study finds that well-funded listings tend to attract more funding, even after controlling for unobserved listing heterogeneity and payoff externalities. Moreover, lenders use publicly observable borrower characteristics to moderate their inferences about creditworthiness. For example, obvious defects like poor credit grades amplify a listing's herding momentum, as lenders infer superior creditworthiness to justify the herd. Conversely, favorable characteristics like friend endorsements weaken the herding effect, as lenders attribute herding to these observable merits. The paper also shows that rational herding is more effective in predicting loan performance than irrational herding. The study uses a variety of identification strategies, including panel data analysis and dynamic Generalized Method of Moments (GMM), to confirm the existence of rational herding. The results suggest that lenders are more likely to make rational inferences about borrower creditworthiness when they have access to publicly available information. The study contributes to the literature on herding by highlighting the distinction between irrational and rational herding. It shows that lenders on Prosper, a peer-to-peer lending platform, may have the motivation and opportunity to make more rational decisions. The findings have important implications for borrowers and lenders, as they suggest that borrowers can increase their chances of funding success by seeking friend endorsements and joining Prosper groups. The study also provides insights into the mechanisms underlying herding behavior in microloan markets.