Melting-Pot or Homophily? - An Empirical Investigation of User Interactions in Virtual Investment-Related Communities

Abstract:     
Much has been discussed in popular press about virtual communities being melting pots of ideas and opinions. However, psychological theory suggests that individuals interact with similar-minded people to reinforce their beliefs, leading to fragmented communities. This paper empirically evaluates individual choices for interactions in virtual investment-related communities. Our analysis of 72,019 individual interactions in 29 stock message boards on Yahoo! Finance investment communities reveals homophilious behavior - i.e., individuals tend to associate with others who share similar backgrounds or beliefs. The behavior strengthens in situations when individuals face information overload, encounter limited information resources, experience high market uncertainty or hold minority opinion in the community. The interaction behavior is consistent with confirmatory bias, a well-known psychological bias that influences individual decision-making process, and could lead to widely-observed behavior biases such as overconfidence in investment activity. The results provide insights into the potential influence and value of virtual investment-related communities.

Keywords: virtual communities, homophily, psychological biases, confirmatory bias, networked economy

JEL Classifications: D71, D81, D83, M31

Working Paper Series