Investor response to default shock: Diversification and strategy shifts in marketplace lending

Using data from a Chinese marketplace lending platform (2010-2017), we analyze how 28,044 investors adjust their behavior after experiencing an unpredictable loan default. This setting creates a natural time-varying difference-in-differences experiment. We find that approximately 10% of investors exit the market. Those who remain significantly improve their diversification, lending smaller amounts to more borrowers. They also shift their preferences toward loans with smaller amounts, shorter terms, and younger, higher-income, and more educated borrowers. This learning effect is stronger for investors who trade less frequently and those with larger portfolios but the learning effect decays over time. We highlight the critical role of salient feedback in investor learning compared to stock market studies.