Effects of transparency: analyzing social biases on trader performance in social trading
- 188 Downloads
Social Trading platforms combine the trading functionalities of classical online broker services with the communication and interaction features of social networks. Next to following other users’ profiles, a main characteristic of social trading platforms is the possibility to follow other users by automatically copying their trades. By being a technologically based financial intermediary that enables individual profit maximization, social trading platforms constitute a contemporary example of financialization. Our empirical analysis of the behavior of traders on a social trading platform provides new insights on financialization related questions regarding the influence of transparency and interaction in delegated investment environments. The disposition effect is a well-studied behavioral bias of investors and traders. Human investors tend to realize returns of their winning positions too early and let unfavorable positions accumulate losses for too long. We find that on social trading platforms the traders’ sensitivity to the disposition effect is influenced by the amount of attention they receive from their followers who invested capital into the traders’ strategy. These novel insights propose a link between principal-agent theory and the disposition effect induced by transparency mechanisms. We extend the literature on trader-investor interaction channels in social trading networks. The results obtained in a social network environment are of high relevance for regulators who have a strong focus on customer protection and financial services regulation. They also provide guidelines for platform designers, traders, investors and social trading platform operators.
Keywordssocial trading digitalization of financial services financialization disposition effect agency theory individual trading performance
- Aalbers, M. (2008). The Finacialization of Home and the Mortage Market Crisis, Competition & Change 12(2): 148–166.Google Scholar
- Aalbers, M. (2015). Corporate Financialization, The International Encyclopedia of Geography: People, the Earth, Environment, and Technology, Oxford, UK: Wiley.Google Scholar
- Amman, M. and Schaub, N. (2016). Social Interaction and Investing: Evidence form an Online Social Trading Network [WWW document] https://www.rsm.nl/fileadmin/home/Department_of_Finance__VG5_/PAM2016/Final_Papers/Nic_Schaub.pdf (accessed 25 August 2016).
- Baghestanian, S., Gortner, P.J. and van der Weele, J. (2015). Peer Effects and Risk Sharing in Experimental Asset Markets, SAFE Working Paper No. 67.Google Scholar
- Buchanan, B.G. (2016). The Way We Live Now: Financialization and Securitization, Research in International Business and Finance Advance Online Publication 23 January, doi: 10.1016/j.ribaf.2015.11.019.
- Currie, W.L. and Lagoarde-Segot, T. (2016). Call For Papers: Finacialization and Information Technology, Journal of Information Technology.Google Scholar
- Dewally, M., Ederington, L. and Fernando, C. (2009). Determinants of Trader Profits in Commodity Futures Markets, Review of Financial Studies 26(10): 2548–2683.Google Scholar
- Doering, P., Neumann, S. and Paul, S. (eds.) (2015). A Primer on Social Trading Networks: Institutional Aspects and Empirical Evidence.Google Scholar
- Epstein, G.A. (2005). Financialization and the world economy, Cheltenham, UK: Edward Elgar Publishing.Google Scholar
- Falkner, R. and Corsthwaite, D. (2013). Mirror Trading and Social Media Marketing: Reulatory and Business Risks [WWW document] http://de.slideshare.net/blackswanpartners/black-swan-partners-reedreed-smithsocialtradingmarketingseminarbooklet (accessed 29 August 2016).
- Garner, C. (2012). Currency Trading in the Forex and Futures Markets, New Jersey, USA: FT Press.Google Scholar
- Holmstrom, B. and Milgrom, P. (1991). Multitask Principal-Agent Analyses: Incentive Contract, Asset Ownership, and Job Design, Journal of Law, Economics, & Organization 7(Special Issue): 24–52.Google Scholar
- Keynes, J.M. (2013). The state of long-term expectation (4th ed.), New York, USA: Cambridge University Press.Google Scholar
- Lagoarde-Segot, T. (2016). Financialization: Towards a New Research Agenda. International Review of Financial Analysis, International Review of Financial Analysis advance online publication 3 April, doi: 10.1016/j.irfa.2016.03.007.
- Lee, W. and Ma, Q. (2015). Whom to Follow on Social Trading Services? A System to Support Discovering Expert Traders, in Proceedings of the10th International Conference on Digital Information Management (ICDIM), pp. 188–193.Google Scholar
- Liu, Y.-Y., Nacher, J. C., Ochiai, T., Martino, M. and Altshuler, Y. (2014). Prospect Theory for Online Financial Trading, PLoS ONE 9(10): 1–7.Google Scholar
- Neumann, S., Paul, S. and Doering, P. (2015) A Primer on Social Trading: Remuneration Schemes, Trading Strategies and Return Characteristics, in Proceedings of the EFMA Annual Meetings 2015.Google Scholar
- Orlean, A. (2012). Knowledge in Finance: Objective Value versus Convention. Northamption, MA: Edward Elgar Publishing.Google Scholar
- Pan, W., Altshuler, Y. and Pentland, A. (2012) Decoding Social Influence and the Wisdom of the Crowd in Financial Trading Network, in Privacy, Security, Risk and Trust (PASSAT), 2012 International Conference on and 2012 International Confernece on Social Computing (SocialCom), pp. 203–209.Google Scholar
- Pelster, M. and Breitmayer, B. (2016) Swarm Intelligence? Stock Opinions of the Crowd and Stock Returns [WWW document] http://dx.doi.org/10.2139/ssrn.2787744 (accessed 25 August 2016).
- Robinson, D. (2014). Return of the daytrader: Can You Earn a Living by Copying Other Investors? [WWW document] http://www.telegraph.co.uk/finance/personalfinance/investing/11123162/Return-of-the-daytrader-can-you-earn-a-living-by-copying-other-investors.html (accessed 29 August 2016).
- Shiller, R.J. (2005). Irrational Exuberance (2nd ed.), New Jersey, USA: Princeton University Press.Google Scholar
- Siering, M. and Muntermann, J. (2013). How to Identify Tomorrow’s Most Active Social Commerce Contributors? Inviting Starlets to the Reviewer Hall of Fame, in Proceedings of the International Conference on Information Systems 2013, Milan, Italy.Google Scholar
- Wooldridge, J.M. (2010). Econometric Analysis of Cross Section and Panel Sata (2nd ed.), Cambridge, USA: MIT Press.Google Scholar
- Zhao, J.C., Fu, W.-T., Zhang, H., Zhao, S. and Duh, H. (2015). To Risk or Not to Risk? in The 18th ACM Conference (Vancouver, BC, Canada), pp. 95–104.Google Scholar
- Zulutrade. (2016). Zulutrade Homepage [WWW document] http://www.zulutrade.com/index (accessed 29 August 2016).