The wisdom of Prosper crowds

Crowds know a lot collectively.  The basis for efficient market theory is that everything known about the market, good and bad, is already priced into it, so that its price is exactly where it should be, supposedly.  This works only if you have a large number of people making a judgment as to where the market should be.  If it's only a few people, then it's likely a poor judgment because those people don't know everything there is to know collectively.

Whether the efficient market theory is true or not is an open question.  There are certainly a lot of contrarians that make a lot of money by going directly opposite the crowd.

The small amount of money I've invested in Prosper.com loans was invested largely by using the collective wisdom of other lenders.  What I've been doing lately is looking at all available loans, starting with the ones ending the soonest.  I only look at the loans that are fully funded or nearly so.  There's maybe three to five loans out of 50 that meet this criterion.  Of those, I'll bid on a majority of them after reading the description of the auctions and looking briefly at the borrower's statistics (debt to income ratio, credit history, etc.).

I'm comfortable investing with this admittedly scant due diligence because, by this point, dozens of other lenders have already made the judgment that this loan is a good balance of risk and reward.  Most of the questions, if any, have been asked of the borrower and those answers have been conducive to getting bids.  Near the end of the listing, the rate is close to what it's going to be, so I stand a good chance of getting the loan funded by bidding a little lower than the current rate.

By contrast, if there's only 12 hours left on a 10-day listing, and there are only one or two bids for $50 on a $5,000 loan, it doesn't mean that this is a gem that has been overlooked.  It means that the rate is too low for the risk.  A high-risk borrower with a current listing is asking for $4,000 at 5%.  This isn't going to get funded.  It's charity, not investment.  (This listing did get a bid, though, it was an unfortunate circumstance, and the state cap on the rate was very low.)

It still remains to be seen whether this is a viable strategy, but there are probably worse ones out there.  (No delinquencies yet!)

It used to be that throwing a dart at the stock pages of the newspaper would generate a portfolio that would stand a good chance of doing well.  It doesn't appear that this would be appropriate for Prosper loans.  There seems to be relatively little cream rising to the top.

Or is it crud?  I don't know yet! 😉