The Impact of Online Forums on Financial Decisions
Participation in online communities can lead to riskier financial decisions. Researchers from Rice University, the University of British Columbia and the University of Zurich reached this conclusion after looking at Prosper.com and eBay and conducting their own experiment. Their study was accepted for publication by the Journal of Marketing Research.
Prosper.com is a peer-to-peer lending site that matches lenders with borrowers. Lenders who participated in online communities with other Prosper.com lenders were more likely to make risky loans then those who didn’t.
For online auction website eBay, the study’s authors look at bidding patterns. The authors identified a set of users and invited half of them to join an online community. Those participating in the online community made more bids and paid more to win eBay auctions than those who didn’t participate in the online community.
In third study, researchers asked participants to imagine they were making loans on Prosper.com. Part of this group was invited into an imaginary community and part of the group was not. Those invited to the group were given varying information about their relationship with others in community. Study participants who felt strong ties with others in the online community were more likely to make risky loans. The reason was that they believed other community members would give them support if a problem occurred.
The results are not surprising. Humans often succumb to herd behavior, mimicking the actions of those they associate with. A participant in an online community who sees others engaging in risky transactions is more likely to engage in similar risky transactions. Worse yet, the sense of belonging to a community creates a false impression that a support system exists, when in fact there is no financial safety net.
It is hard not to follow a community’s actions when others are claiming to make money, but that is often the best strategy. You never know how successful other participants truly are. More importantly, other participants will not help you financially if you lose money. Interact online, but have a rational and independent plan for managing your finances offline and without community pressure.
Source: “Does Online Community Participation Foster Risky Financial Behavior?” by Rui (Juliet) Zhu, Utpal Dholakia, Xinlei (Jack) Chen and René Algesheimer.