When it comes to doing business in the world of peer-to-peer lending, connections count. Prosper.com, the most popular of the recent crop of P2P lending sites, has the statistics to prove this. This is the phenomenon of social capital. One Prosper user, islandmele, emphasizes its importance as a form of securing the loan:
"Should I ever even THINK about defaulting on this loan, I will never be able to leave my house again; prevented from ever catching a good wave; given the brush-off at family gatherings; be unable to run for local office; never be invited to the kewl parties; and shunned at the local Starbucks."
She proceeded to collect 40 endorsements from friends, colleagues and family to prove her point. Some backed their endorsements with bids on the loan, but many just lent their reputation. The result? Her loan for $25,000 was fully funded on the first day of its seven-day listing, and her interest rate dropped to an amazing 5%. She invested a great deal of social capital and the return on that investment was a great deal on a loan. She's not alone. More and more people are starting to realize that reputation and social connections matter. This is the new economy, and the repo man has been replaced by your next-door neighbor.
Some may see this listing as an extraordinary example, but islandmele simply used the social facilities many of us have been neglecting for so long and proved that they matter more than ever. The data backs this approach. Not only do lenders swarm to someone whose social network is willing to lend them money, but Prosper reports a default rate of just 1.2% for loans where a friend has given an endorsement with at least a $50 bid. This is a stark contrast to the 7%-15% default rates the peer-to-peer lender claims overall, depending on which source you reference. Of course, this "it-takes-a-village" approach makes sense. Would you default on a loan knowing that one of the people who lent you the money was the minister of your church, or even your boss?
Social Capital is being quantified more and more often in new ways. For example, I started writing this blog about a week ago. During that time, the only advertising I did was mentioning it on my Facebook news feed and a few e-mails, yet the number of visitors has already reached 100. This shows that I have at least enough social capital saved up among my friends that they would take a few minutes out of their day to learn about something new based just on my recommendation.
This sort of quantification can also be used to turn reputation and social network into profit. For example, if I add Google's AdSense to my site, I can get paid for every view of their ads. In a sense, I would be getting paid for my ability to draw people, much the same way celebrities get paid for endorsement deals. Funny? Well, You're reading this, aren't you?
If you're interested in finding out more about the scientific study of social capital and attempts to quantify it, you can take a look at The Social Capital Benchmark Community Survey, a study which looked at different samples of the population throughout the United States and used specific questions to establish metrics for the levels and roles of social capital in different communities. Also, please check back here next week for another article related to the subject.
1 comment:
So if people are now starting to speculate on friends, when does the inevitable devaluation of friends occur. Or even worse, the inflation of friends, where 100 friends are only worth what one friend was worth five years ago. I think I am going to hide my friends in an offshore account to protect their value.
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