Understanding financial behavior What do social studies of finance bring to the table?

Alex Preda, King’s College London

Over the past few years, we have seen▪ An increased interest of behavioral finance in social interactions—Hirschleifer

2017 on social finance

▪ Investigations of large datasets of social interactions from trading and their effects

on trading decisions (e.g., Heimer 2014, 2016; Altshuler, Pentland and Gordon

2015)

▪ This opens up the possibility of a dialogue between behavioral finance and social

studies of finance

Where do we start this dialogue?▪ Decisions are interactive processes—they are not supported only by individual

cognitive elements, but are made in social interactions

▪ Social interactions matter

▪ In financial markets, social interactions are mediated by technology

▪ But transactions are mediated by technology too

Take one example:

Take another example: Moneybox

Average investment on Moneybox:▪ £20/ week

▪ 125,000 users

▪ Annual cumulated investments: £130,000,000

Take yet another example

eToro

▪8 million users worldwide in 200 countries

▪Integrates dedicated social media with financial trading

▪Participants see each other’s actions

▪Participants are ranked according to their financial

performance and see each other’s performance

▪Participants communicate with each other in real time

What do we see here?▪ An increased integration of social media with platforms for conducting financial

transactions

▪ The emergence of dedicated social media for financial transactions across

markets: currencies, commodities, equities, cryptocurrencies

▪Near-total transparency of transactions—a scopic transactions

system

The question is:▪ Does the use of social media in financial transactions change decision-

making and behavior?

▪ We know that the use of social media changes:

▪ Dating behavior

▪ Political behavior

▪ So… what about financial behavior?

How do we go about this question?▪ Analysis of large datasets from social trading networks

▪ Two platforms:

▪ 77,000 traders, 3 million transactions over 18 months

▪ 4,200 traders, 1 million transactions over 18 months

▪ (Gemayel and Preda 2017, 2018; Tong, Preda and McFaull 2018)

▪ We compare with transactions sets without social media

▪ Control for same period of time and assets

We look for▪ Survival in the market—how long do traders stay in the market if they use

social media?

▪ Herding—do they imitate each other more, or not, compared with traders

who do not use social media?

▪ Disposition effect—do they liquidate assets earlier and keep losers in their

porfolios for longer, compared with traders who do no use social media?

Findings

Investors who use social media very

intensely…▪ Tend to stay longer in the market, and have higher cumulative losses

▪ This is puzzling? Why?

▪ One possible explanation: investors might see losses as the cost of being sociable

▪ Implications for regulators: how to regulate the use of social

media in financial transactions, if they lead to more losses?

Other findings:▪ Herding levels among traders who use social media are:

▪ Higher and much more persistent in time, compared with herding among traders

who do not use social media

▪ Puzzle: why is herding so persistent?

▪ This can have implications with respect to market volatility

Other findings:▪ Disposition effect is lower for traders who use social media

▪ This means: losses tend to be liquidated quicker, compared with traders who do

not use social media

▪ Why? This is an effect of the scopic system (permanent reciprocal observation)

Overall:▪ The integration of social media with trading changes behavior and decision-making

▪ Financial markets are not immune to behavioral modifications induced by the use

of social media

▪Not all effects are positive!

Implications for regulators▪ The integration of social media with trading is currently not regulated

▪ Yet we see:

▪ more cumulated losses

▪ very persistent herding

▪ social media have different features with different behavioral effects

▪How do we approach regulatory interventions?

Thank you