To Reduce Risk, Unfriend Your Manager

Facebook, LinkedIn, and Twitter—and what they mean to your investments.

Is your fixed income fund manager constantly tweeting? Does your equities manager post daily items on LinkedIn? Then it might be time to take a closer look at the risks they are taking with your portfolio, new research has claimed.

Eugene Chan from the University of Technology in Sydney and Najam Saqib from Qatar University have published a paper examining how the use of social media affects the risk investors take.

“We propose that using online social networking sites increases users’ financial risk-taking,” the paper claimed. “We draw on the cushion hypothesis and social capital theory to make our prediction.”

“We propose that using online social networking sites increases users’ financial risk-taking.” — Chan & SaqibThe cushion theory is based on evidence from “collective” East Asian societies, the authors said, and defines a feeling of safety when taking financial risks. These collectives are recreated online through social media, but unlike in real life, offer no actual support—especially regarding taking financial decisions.

The authors also said that unlike offline, where relationships take a relatively long time to build, an online “society” is created quickly and includes people who would not normally be relied upon for financial assistance.

The paper reported on three different studies conducted by the authors using sample investors who all used Facebook split into two groups. In each experiment, one of the groups spent five minutes on the social networking site before performing a set investment-based task, while the others spent the same time before the task on a news channel.

“Across three studies, we find that online social networking increases users’ financial risk-taking,” the authors said. However, there were differences in the effects these networks—and the quality in terms of the closeness of who was linked to whom—had on investment decisions.

Sample candidates were drawn uniquely from the US, which does not function as a collective society, the authors said. But, they warned, investors who already experience such a society offline, in countries found in East Asia for example, could be prone to an even more accentuated increase in risk-taking.

The authors intend to conduct similar experiments with other social networking channels, and said blogs and even eBay had a “cushioning” effect that led to greater risk-taking.

In April, Chan published a paper examining how the presence of perceived good-looking men could stimulate extra risk-taking in male colleagues. Chan’s research is conducted on the behaviours of individuals, although evidence suggests all categories of market participants are prone to the same biases.

Both papers can be purchased on the Science Direct website.

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