Do Individual Investors Understand How Social Media Advice Influences Their Investment Decisions?

Abstract

Individual investors increasingly rely on investment advice from social media platforms. Even advice with little, if any, predictive value appears to influence investor decisions. Our study reports the results of two experiments that help explain why investors rely on such advice. We find that some investors rely on advice with low predictive value because they believe that the advice is informative. However, other investors who rely on the advice are unaware of its influence on their investment decisions. Specifically, we find that sentiment-only social media advice influences investment decisions even among investors who believe that the advice should not and does not affect their decisions. Further, we find that investors rely equally on advice that conveys only sentiment and advice that conveys information about firm fundamentals, despite these same investors indicating that they should and did rely more on fundamentals-related advice. Our research suggests that regulators’ approach of asking investors to evaluate the credibility of the source is inadequate. To avoid being influenced by low quality information, investors need to avoid it entirely.

Keywords: social media; sentiment; fundamentals; source credibility; tone