Federal Reserve Bank of Cleveland Working Paper 15-22
Facebook Finance: How Social Interaction Propagates Active Investing
Abstract. This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader’s good short-term performance causes them to contact others. A trader’s activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders.
Keywords: social networks, active trading, retail traders, peer effects, social transmission, investor communication.
In brief
Active trading strategies spread through social networks of retail investors.
Using a social network for traders linked to individual trading records, the paper finds that traders who do well in the short run reach out to others, and that traders trade more when their peers perform well and communicate more. The staggered entry of brokerages into partnerships with the network supports a causal interpretation. This communication pattern promotes active trading even though the network itself reveals how rarely retail traders succeed.
| Panel A. Design | ||
|---|---|---|
| Question | How do active investing strategies spread through social networks? | |
| Data | A new database of social activity linked to individual-level trading records | |
| Method | Staggered entry of brokerages into partnerships with the social networking platform | |
| Panel B. Main findings | ||
| Traders with good short-term performance | Contact others | |
| When peers perform well and communicate more | A trader’s activity increases | |
| Net effect | Communication supports active trading despite low success rates | |
Summarized from the paper. See the paper for exact estimates and specifications.
Read and cite
- Working paper (open access), Federal Reserve Bank of Cleveland
Heimer, Rawley Z., and David Simon. 2015. “Facebook Finance: How Social Interaction Propagates Active Investing.” Working Paper 15-22, Federal Reserve Bank of Cleveland.
@techreport{heimer2015facebook,
author = {Heimer, Rawley Z. and Simon, David},
title = {Facebook Finance: How Social Interaction Propagates Active Investing},
institution = {Federal Reserve Bank of Cleveland},
type = {Working Paper},
number = {15-22},
year = {2015},
url = {https://www.clevelandfed.org/publications/working-paper/2015/wp-1522-facebook-finance-social-interaction-investing}
}
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