Better than your average interest rate: peer lending sites like Prosper.com appeal to investors with high interest rates. They also subtly encourage risk-taking, according to a new study.
Social networkers ought to pay especially close attention to personal finance: new research out of Rice University shows people who participate in online communities–particularly financial ones such as Prosper.com and eBay–are more likely to risk and lose money.
Utpal Dholakia, lead author and Professor of Management at Rice, said, “emerging evidence indicates that online community participation impacts many aspects of consumer behavior, and our findings reveal that this impact extends to financial decision-making.”
So can an expat really tweet himself broke?
Not per se, but the study did find the same qualities that attract someone to social networking may also predispose her to taking greater financial risks. On the peer-to-peer lending site Prosper.com, for example, a study of 600 lenders conducted over an 18-month period showed those who participated in online communities possessed riskier loan portfolios, lending money to borrowers with worse credit ratings and greater chances of default than community non-participants.
Also, in a controlled field experiment conducted with more than 13,000 eBay customers over a two-year period, those who joined the online community engaged in riskier bidding behaviors by placing more bids on each item. Community members also spent more for items they won.
Researchers found a couple key drivers for this behavior:
- Online community participants tend to believe the community will support them in times of difficulty. This perceived support emboldens them to take risks.
- The more the topic of the site or online forum relates to finance/investing, the more powerful this effect becomes. So sites like Twitter and Facebook have less of an impact than eBay or Prosper.
Lead author Dholakia commented:
Participants in these sites somehow come to believe that their fellow community members will come to their aid when something goes wrong, but in reality, they are out there on their own and could suffer adverse consequences. These communities are different from social networking sites like Facebook, because the individuals involved are usually strangers whose identities are unknown to the consumer.
He likened it to the way groups of kids, particularly teens, often encourage risk-taking, also warning of wider potential consequences:
If, for example, members of a discount brokerage firm’s online community invest more aggressively by buying riskier stocks that perform worse than market averages this would affect them adversely and also hurt the firm’s standing and brand name.
Expats in particular should beware seeking investment advice in online communities. On one hand it may seem natural to approach people in similar circumstances for their opinions. Yet at the same time the situation presents the exact same risks mentioned above. If anything, expats may be more vulnerable to this effect, given their relative isolation abroad. As always, expats should approach investments skeptically, preferably after consulting a professional financial advisor with a proven track record.