Does Experience Teach Us Wisdom or Lead Us Astray?

SKBI Newsletter | October 2025  

Does Experience Teach Us Wisdom or Lead Us Astray?

Research Perspective

Industry Insights

Pengfei Ma
Assistant Professor of Finance
at SMU

Jeffrey Jaensubhakij
Advisor to GIC

Personal experience serves as a crucial source of our knowledge and intuition. But is experience always reliable? Does it teach us wisdom or lead us astray? A recent study conducted by SMU explores this question by examining how loan officers’ personal economic experiences in the local real estate market influence their ability to set loan spreads for corporate borrowers.

In a recent interview, Dr. Jeffrey Jaensubhakij shared his insights on the interplay between intuitive, experience-based judgment and standard (model-based) decision-making from an asset management perspective.

Key Messages:

• These loan officers (i.e., lenders) tend to overweight their recent personal economic experiences—particularly local housing price growth near their own properties—when forming beliefs, which subsequently influences how they price loans and determine credit spreads.
• Such personal experience effects are domain-specific and driven by lenders’ beliefs about the value of borrowers’ real estate assets.
• The excessive fluctuations in lender optimism help amplify changes in credit spreads across the credit cycle.

Overall, these findings suggest that personal experience—rather than helping to avoid biases—may instead contribute to them under certain conditions. Experience-induced biases in the lending market carry significant implications, including the potential to create excessive fluctuations in credit spreads throughout the credit cycle.

CARVALHO, Daniel; GAO, Janet; and MA, Pengfei. 2023. Loan spreads and credit cycles: The role of lenders' personal economic experiences. Journal of Financial Economics. 148, (2), 118-149.

Key Challenges:

• Standard finance models provide consistent and reliable investment decisions across various contexts and timeframes. However, they are less effective in responding to rapid market shifts or rare, unpredictable events.
• Intuitive judgment enables quick and creative adaptation to such scenarios, often by learning from one situation and applying that experience to a different class of problems. Its weakness, however, lies in the lack of consistency compared to standard models—a limitation that aligns with Prof. Ma's findings on loan officers.
• To harness the benefits of intuitive judgment while minimizing its drawbacks, financial contracts need thoughtful design. For instance, implementing bonus payouts over a five-year period rather than a single year can help foster a counter-cyclical mindset among portfolio managers and curb short-term biases induced by recent experiences.

“Both types of decision-making processes are critical for firms operating in an ever-changing world,” Dr. Jaensubhakij emphasized. “But firms must carefully design contracts to counteract the factors that contribute to negative behavioural biases in intuitive judgment.”

Meet the Author:
Asst Prof Tianhao Yao joined SMU in 2023 after completing a PhD in Finance from HEC Paris. His research interests include corporate finance, environmental, social, and governance issues, sustainable finance, and asset management.

Meet the Expert:
Dr Jeffrey Jaensubhakij is Advisor to GIC Pte Ltd. He was previously Group GIO at GIC where he oversaw capital allocation across asset classes and regions and across internal and external investment mandates. Over the course of his career, he headed GIC’s Public Markets Investments team, its European Operations and Global Equites and North American Equities teams. He holds a PhD in Economics from Stanford University and has been on the SKBI Advisory Board since 2021.

About SKBI:

The Sim Kee Boon Institute generates financial economic research through multidisciplinary collaborations involving not only the SMU community, but also research talent from around the world as well as industry and public-sector partners. The Institute will focus its efforts on the areas of (1) Market Innovations and FinTech, (2) Sustainability and Green Finance, and (3) Household Finance and Behaviour. To maintain relevance to finance practitioners and policy-makers, SKBI also adopts a view on Asian and global economic trends. View SKBI’s research. 

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