Confirmation bias on social media is nothing new in politics and news. New research shows it's a challenge听in investing, too.
As ongoing revelations about Facebook鈥檚 algorithm are showing, social media鈥檚 ability to shape our attitudes by steering users into echo chambers is raising questions about our national discourse and drawing increasing attention from regulators.听
Echo chambers鈥攆ormed when users are directed to media that confirm their existing beliefs, without providing a balanced view鈥攁re pervasive in media and politics. What鈥檚 less understood is whether these echo chambers affect our daily lives, including our personal investing decisions.听
Now, new research from the Leeds School of Business at the 麻豆影院 is shedding light on the pervasiveness of echo chambers in investor beliefs and financial decisions.
鈥淎 financial context is a surprising place to see echo chambers,鈥� said Tony Cookson, associate professor of finance at Leeds. 鈥淚n politics, you can be wrong, but you don't have to pay a price for it. In finance, if you鈥檙e wrong, you pay for it through worse returns鈥攜et we still find echo chambers are pervasive.鈥�
In his research, Cookson and his coauthors relied on data from StockTwits鈥攁 platform similar to Twitter, but devoted to conversations about investing. Another important difference is that, unlike Facebook or Twitter, StockTwits does not have a strong recommendation engine to suggest followers or posts based on the user鈥檚 activity.听
As it turns out, people don鈥檛 need an algorithm to put themselves in an echo chamber.
鈥淚f I declare in my posts that I鈥檓 bullish on Tesla, and then subsequently start following other Tesla bulls, that looks like I鈥檓 like tilting my information sourcing toward people who agree with me, versus just tilting it toward the topic itself,鈥� Cookson said. 鈥淎nd this is actually pervasive across all kinds of stocks that people discuss on these platforms.鈥�
A troubling trading trend?
What鈥檚 more, Cookson and coauthors found users who put themselves in echo chambers were more likely to be active traders鈥攑erhaps to their own peril, given the limits of their information. StockTwits is not a trading platform, so the researchers can鈥檛 see actual trades, but based on their posting activity, 鈥渨e see these really strident disagreements by people who get their information from different sources, and this leads to persistent and sustainable trade in a really publicly observable way,鈥� he said.
StockTwits users represent a good cross-section of investors and include both amateur traders as well as professionals. If you think being a pro trader insulates you from echo chambers, 鈥渋t doesn鈥檛鈥攊t鈥檚 to a lesser degree than novices, but professionals aren't immune to wanting to confirm their existing beliefs,鈥� Cookson said.听
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鈥淚n politics, you can be wrong, but you don't have to pay a price for it. In finance, if you're wrong, you pay for it through worse returns.鈥�
Tony Cookson
His findings about investment echo chambers represent the latest research thread for Cookson, a prolific publisher who also serves as an associate editor at the Journal of Financial Economics. His work has explored a wide variety of topics from bank mergers to fracking royalties to casinos. At the heart of this new research agenda, Cookson is trying to understand the role of information in financial markets and how it drives investor behavior.
He has been working with StockTwits data since about 2015, but interest this latest work on social platforms has intensified following some of the interesting retail investing climate, including outages on Robinhood and the GameStop short squeeze鈥攖he latter also driven by social media, in this case, Reddit. Cookson鈥檚 working paper won the NASDAQ Award for best paper on asset pricing at the 2021 Western Finance Association meetings; it also won best paper awards from the Chicago Quantitative Alliance and Midwest Finance Association.听
鈥淲e were always getting interest from people who work in investor behavior and social media, but then this became front page news, with Reddit,鈥� he said. 鈥淭hat doesn鈥檛 happen too often in academic research, so it has been exciting to see this play out.鈥�
This research first appeared as a working paper available on the听. It is forthcoming in the听. Cookson鈥檚 co-authors included Joey Engelberg and Will Mullins, both of the University of California San Diego.
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