Prosper simply MUST find a way to increase aggregate market-level returns. They simply won't survive as an investment vehicle if they don't. You won't attract a significant number of sophisticated investors with deep pockets unless they have reason to believe that they can achieve good results.
I'm not sure I agree. What market level returns are you talking about? Beating Propser's average? Bank CD's? The stock market?
I think you are talking about a return which will create dimimishing returns. If a really good borrower (market savvy and aware) comes to Prosper and tries for a loan and gets a bad rate, for example AA for $2k @ 15%, then they are going to cancel the listing and go somewhere else. They could even do better with a credit card! So you are left with false-positive AA's in trouble willing to take anything, might as well lend to an HR in that case because a mortgage default is around the corner.
Are you going to go after the riskier loans @ higher rates to beat the average? That has proven not to work so well unless you are lucky. People dont often pay the $$ back which causes lots of lenders to quit.
In both cases, there is diminishing return... as the rate a borrower is willing to pay goes up, so does the risk no matter what credit grade. So for me it would be logical to go after the most savvy borrower... but that means a lower return. I guess it does! And you know what, I can live with it as long as my money comes back. And I am doing well compared to other markets in the process.
...And I would bet that would be true for many more lenders. There would be fewer disgruntled and bitter folks here that swung for the fences, and in general fewer quitters, more money cycling back, attracting more savvy borrowers to the marketplace getting good value on their need for a loan.
In the end, its our own greed to blame, imo. All of us had the delusion of grandeur at some point but the reality is that the best way to make a good return is to lend to the smartest, safest people. So what if that means a 2k loan at 7%, a 10k loan at 11%?
I've fallen into the greed trap. Early on it was big returns or bust, but I have modified my thinking. I've switched to less risk and a higher likelihood of return. I might occasionally take a risk on an E or HR but only when I really think they will pay. Otherwise, I think I do myself and Prosper a favor investing in those that deserve it.
If we all funded those that deserved it instead of swinging for the fences, we'd have a fraction of those complaining because while there are collections issues, etc, they were not created by Prosper, they were created by our own greed and wish to beat the market or other lenders.