Money has tremendous power; being under financial pressure such as from debt, for example, can be accompanied by emotional responses in people. Hence, the human emotional spectrum is a potential source of insight into, and also a means of monitoring, borrowers’ financial behavior. In fact, financial default is a deviant behavior that is more likely to be driven by individual subjective status than by other, more traditionally considered objective (e.g., demographic or socioeconomic) factors. Although existing studies have paid great attention to the relationship between emotions and well-being or to leveraging of alternative sources (such as public social media usage) to account for credit risk evaluation, little is known about the value of emotions in credit risk management, and there is no theoretical or practical guidance for connecting the two. In the current study, collaborating with a leading Asian microloan company, we aim to bridge that gap. We are able to improve the understanding of the link between emotions and credit risk evaluation from at least two perspectives. First, we focus on happiness and anger by means of two measurements: immediate emotions near the focal time point, and average emotion tendency over a relatively long term. Moreover, we comprehensively explore the role of emotions both for a financial company’s loan-approval decisions at the loan pre-approval stage and repayment interventions at the loan pre-maturity stage. This paper presents three interesting findings. First, anger at the pre-approval stage has a pronounced U-shaped relationship with borrowers’ default probability. This may go against the intuition that higher intensity of anger leads to less frequent moral behavior; and in fact, we reveal what we call “a bright side of anger” with respect to curbing of financial credit risk: moderated intensity of anger at the pre-approval stage suggests a lower loan default probability. The second finding presented herein is that average happiness tendency at the pre-maturity stage becomes informative and valuable, as it shows a U-shaped relationship with loan default; as for anger, it does not work therein. Third, our field experiment with two well-recognized repayment-reminder strategies indicates that their effectiveness hinges on delinquent borrowers’ emotions. In general, a positive-expectation reminder is useful for prompting repayment when delinquent borrowers are in strong emotional intensities, regardless of anger or happiness. However, a negative-consequence reminder results in a higher default probability for borrowers who maintain high immediate happiness before the loan maturity dates. To explain our findings, we apply and extend the classical appraisal theories of emotions by way of emotion-related orientation-matching hypotheses, which extended theories offer non-trivial theoretical and practical implications
