Experts vs. Non-Experts in Online Crowdfunding Markets

Abstract

The growth of crowdfunding markets that include both expert and non-expert investors will soon accelerate due to recent changes in Securities Exchange Commission (SEC) regulations. Work suggests that non-experts (1) may benefit from experts’ participation via mimicking their trades, but (2) will also face a cost as experts crowding non-experts out of the best opportunities ensures that non-experts will suffer lower returns than experts. Traditional economic theory holds that the crowding effect means the relative importance of non-experts in the market will decline over time until they become unimportant. Exploiting a unique period in one crowdfunding market (Prosper.com) that allows us to directly estimate the net cost of competing with better informed experts, we find that the net negative effects of expert participation on non-experts are small. We use simulations to both better understand (1) the factors that may contribute to the small expert/non-expert Prosper return gap, and (2) the market characteristics and crowdfunding platform choices that influence experts’ and non-experts’ returns, their return gap, and the extent to which non-experts are better or worse off relative to a market without expert participation.

Keywords: FinTech, Crowdfunding, Experts, Non-experts

JEL Classification: G10, G11, G14, G18, G23, G4