The article "Rational Herding in Microloan Markets" by Juanjuan Zhang and Peng Liu examines the behavior of lenders in microloan markets, specifically on Prosper.com, the largest microloan platform in the United States. The study uses a unique panel dataset tracking funding dynamics of borrower listings on Prosper.com from February 2006 to September 2008. The authors find evidence of rational herding among lenders, where well-funded borrower listings attract more funding after controlling for unobserved listing heterogeneity and payoff externalities. Lenders engage in active observational learning, inferring the creditworthiness of borrowers by observing peer lending decisions and using observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify herding momentum, while favorable borrower characteristics (e.g., friend endorsements) weaken it. The study also shows that rational herding outperforms irrational herding in predicting loan performance. The findings highlight the importance of distinguishing between irrational and rational herding for borrowers and lenders in microloan markets.The article "Rational Herding in Microloan Markets" by Juanjuan Zhang and Peng Liu examines the behavior of lenders in microloan markets, specifically on Prosper.com, the largest microloan platform in the United States. The study uses a unique panel dataset tracking funding dynamics of borrower listings on Prosper.com from February 2006 to September 2008. The authors find evidence of rational herding among lenders, where well-funded borrower listings attract more funding after controlling for unobserved listing heterogeneity and payoff externalities. Lenders engage in active observational learning, inferring the creditworthiness of borrowers by observing peer lending decisions and using observable borrower characteristics to moderate their inferences. Counterintuitively, obvious defects (e.g., poor credit grades) amplify herding momentum, while favorable borrower characteristics (e.g., friend endorsements) weaken it. The study also shows that rational herding outperforms irrational herding in predicting loan performance. The findings highlight the importance of distinguishing between irrational and rational herding for borrowers and lenders in microloan markets.