Online Community Participants Make Riskier Financial Decisions

By November 07, 2011
Keywords : Smart city, America, EMEA

Participants in social networking sites specialising in financial matters are more likely to take greater risks when choosing their investments.

Membership and active participation in an online community may lead users to take investment decisions which carry greater risk. Researchers at Rice University (USA) and the Universities of Zürich (Switzerland) and British Columbia (Canada) have come to this conclusion, after three different studies carried out on Prosper (a peer-to-peer lending website) and auction website eBay. Having analysed the behaviour of 600 people registered on Prosper over a period of 18 months, between April 2006 and September 2007, the researchers noticed that those who belonged to the online Community, which enabled them to post messages on the site, possessed riskier loan portfolios and lent their money to borrowers with worse credit ratings and greater chances of default than non-members.

Support can prove illusory

A similar phenomenon has also been observed among 13,375 eBay users in Germany. From January 2004 to October 2005, eBay customers posting messages on the site’s Community pages showed a far more aggressive attitude than Community non-participants. They engaged in riskier bidding behaviour, placing more bids on each item and regularly paying higher for a given item when their bid was successful. Another study carried out among 120 students showed that online community participants tend to believe that the community will support them in a crisis or difficult situation, and this led them to be somewhat less inhibited in their financial decisions. The more actively they participated in the community, the higher the risks they were prepared to take.

Collective consciousness isn’t always your best adviser

“These communities are different from social networking sites like Facebook, because the individuals involved are usually strangers whose identities are unknown to the consumer,” explains Uptal M. Dholakia, co-author of the report, warning that “participants in these sites somehow come to believe that their fellow community members will come to their aid when something goes wrong, but in reality, they are out there on their own and could suffer adverse consequences.” So the emergence of a collective consciousness among those uninitiated to the world of Finance - as already discussed in an earlier L'Atelier article - wouldn’t necessarily be such a good thing, without some specialist guidance. The researchers point out that this model also applies to members of an online adolescent club for instance, or to individuals who join an online support group run by a hospital, which may lead them to choose riskier treatment options.



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