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Investing and sociability

Are active investors more social than passive investors? A study referencing social media says yes.

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The more social someone is, the more likely they are to use an active investing approach, says a recent study from Brandeis University. The finding may also help explain the persistence of active investing in the face of empirical evidence that suggests passive investing delivers better results over the long run for most individual investors.  

Authors David Simon and Rawley Heime based their conclusions on an analysis of a proprietary database from a social-media website frequented by investors. More details on their findings and methodology can be found in their recent paper, Facebook Finance: How Social Interaction Propagates Active Investing.

A summary might be offered as follows. Passive investors buy the basket of stocks in the market index and get the market return whereas active investors experience variability around the market trend. Active investors on a hot streak tend to communicate their “prowess” to others, so if an individual has a lot of social contacts, they are more likely to hear of one of these active investors making a killing in the market and be encouraged to increase their active investing.

In one example, a 34-year-old trader made nearly 500 trades that resulted in a total gain of $72,303 over the course of a single week in November 2009. Out went 478 mostly celebratory messages to 128 other traders. “Upon receiving these messages, the 128 recipients increased their aggregate trading activity the following week by almost 30 percent,” the authors write.

It’s an interesting finding but I’m not sure if examining just one social-media database is sufficient. For example, if active investors predominate on one social-media website and passive investors predominate on another, I suspect the two sources could have conflicting findings. Besides, one could argue passive investors are more social simply because they have more time to spend with family and friends, whereas active investors have to do a lot of research and follow markets more closely.