Perils of Big Data

“Big data” can help determine who really deserves a loan. But there are dangers.  Read more in this recent Slate article:
Our friend Andy Schwartzman sums it up: The buzzword tsunami that is “big data”-a handy way of describing our vastly improved ability to collect and analyze humongous data sets-has dwarfed “frictionless sharing” and “cloud computing” combined. As befits Silicon Valley, “big data” is mostly big hype, but there is one possibility with genuine potential: that it might one day bring loans-and credit histories-to millions of people who currently lack access to them. But what price, in terms of privacy and free will (not to mention the exorbitant interest rates), will these new borrowers have to pay?

In the not so distant past, the lack of good and reliable data about applicants with no credit history left banks little choice but to lump them together as high-risk bets. As a result, they either were offered loans at prohibitively high rates or had their applications rejected.

 Thanks to the proliferation of social media and smart devices, Silicon Valley is awash with data. While much of it has no obvious connection to finance, some of it can still be used to make accurate predictions about the user’s lifestyle and sociability. As a result, a new generation of companies is beginning to deploy algorithms that sieve through these data to separate trustworthy borrowers from those likely to default and to price their loans accordingly.

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