78 Understanding Rational Decision Making
as he read a fi nancial analyst’s stock research report on a recently listed chemical manufacturer,
Georgia Gulf Corporation (GGLF). Each expert was asked to play himself and to make a decision
based on the information provided. The comments displayed refl ect the decision criteria for mak-
ing investment decisions and illustrate how important it is that professionals address them fully. In
addition, the comments show how important it is that professionals are mindful of the benchmarks
experts use to evaluate new investment opportunities. All of the comments are numbered in the
order they were made. Comments that were repetitive or did not directly refl ect the experts’ deci-
sion criteria, such as comprehension-related comments, are not included here.
Both expert investors found information about the nature of the investment in the documentsthey read. And both investors were either satisfi ed with, or had no questions about, the manage-
ment of the fi rms. However, neither investor was satisfi ed with the terms of the deal. Neither
investor was convinced by the arguments made for the values of the fi rms, neither was certain he
had the information needed to ascertain the risks and liabilities associated with the proposed invest-
ment, and neither was convinced the fi rms had sustainable competitive strategies. Thus, although
both investors found several of their decision criteria addressed, neither thought the recommended
investments compared favorably with other investment opportunities, and, as a consequence,
decided not to part with their money.
Lending Decisions: Responses to Requests for Loans
Audiences, acting as lenders, who want to choose the best lending opportunity available to them
make lending decisions. Examples of lending decisions include a commercial banker’s decision to
approve a new line of credit for a client company, a credit committee’s decision to renegotiate the
terms of an existing loan for a client in fi nancial distress, and an investment banker’s decision to
underwrite a bond on behalf of a client company.
Audiences make lending decisions in order to increase the value of their portfolios while keep-ing risk at an optimal level. To accomplish this, they must be able to assess the risk of any specifi c
loan and its impact on the risk level of their portfolio as a whole.
Consumers regularly seek lending decisions from potential lenders when they do not haveenough cash to cover an expense. Corporations seek lending decisions when they need to raise
capital or protect it but do not want to dilute the value of their shareholder’s equity. Documents
and presentations professionals produce in order to elicit lending decisions include consumers’
credit applications , bankers’ internal loan recommendations , as well as some business plans and acquisition
plans.
The 5Cs credit model with its fi ve decision criteria— character , capacity , capital , conditions , andcollateral —is a widely recognized framework for making lending decisions. A study of 104 lend-
ers fi nds that experienced lenders use the 5Cs model but weight accounting-related criteria more
heavily and character data less heavily than novice lenders.^80
When making residential mortgage-lending decisions, the criteria loan offi cers most commonlyuse include the borrower’s profession, the borrower’s employment situation, the borrower’s assets
and liabilities, the borrower’s capacity for repayment, the loan-to-value ratio of the property, and
the existence of guarantors.^81 Unsurprisingly, these criteria are highly correlated with the default
risk of residential mortgages.^82 If lenders have the opportunity to meet borrowers face-to-face, they
will also evaluate the borrowers’ nonverbal behaviors and the narratives borrowers create to explain
questionable information on their credit reports.^83
Commercial bankers use somewhat different decision criteria when lending to new companiesas opposed to existing ones. When deciding whether to lend to existing companies, commercial