Behavioural Economics and Social Media
One of the largest factors that inhibits investors is knowledge. If an investor doesn’t know about an opportunity, they aren’t very likely to invest in it. Individual investors join large funds for this reason – major investment companies have immense amounts of resources and technology that can process and predict information at higher speeds than an individual investor.
There has been controversy within the traders whether to make room for behavioural economics or to attempt to curb its influence. Individual e-trading has become more viable to the single investor since the 1990’s. People are now making their own decisions in the markets in both short-term and long-term investing. One of the largest perceived dangers in this change is the higher probability of cognitive bias and its effect on the markets.
Social networks are often used to correct some of the hazards of cognitive biases by making the probability of scams less likely. However, they can also be used to mislead a person into thinking more or less of a business, given the amount of hearsay versus research on the company. In most cases, the opportunity for “whistleblowers” to debunk a claim on any social media outlet will outweigh the attempt at general propaganda.
The trust in banks and bankers is at an all-time low. Their lack of accountability for failing the average investor while accepting bail-outs and giving themselves bonuses has many investors choosing to shy away from letting investment bankers make decisions with the investor’s money. Investor confidence is shaky and social media has helped rebuild the financial stability of the market for individuals.
There are ways to keep behavioural economics to a minimum in the market. High-frequency trading is an example of this. These financial firms have high-speed computers, buy stock milliseconds before an investor does and then resells the same stock at a very tiny mark-up to that same investor. The mark-up price is so insignificant, most investors do not notice. Yet this firm’s computer will make a small percentage off of the resell of a stock an investor was in the process of purchasing, the entire process taking under a second to achieve.
Not all markets find high-frequency trading ethical. Canada and Australia are beginning steps to protect their markets from it; the argument being that it gives large firms able to spend hundreds of thousands of pounds on a computer capable of micro-burst transactions a severe edge over the individual trader – thus making a weaker market as a whole.
Ironically, most people, investors and non-investors alike, found out about high-frequency trading via YouTube and Facebook. There is also a book on the topic – Flash Boys by Michael Lewis. The books reception in the American financial community was so dramatic, that it was quickly picked up by many magazines and popular TV shows. This led to many interviews with Lewis and even more exposure over the internet.
Financial firms are busily refuting how high-frequency trading is happening and debating whether it is healthy for markets, but people are looking closer at the way their firms do business and that is a huge change. More countries are likely to adopt speed regulations on trading or declare high-frequency trading unlawful due to all of the exposure social media is giving to to topic… At least until another grumpy, piano playing cat with a singing dog comes along to meme away the problems.
Social media has clearly played a part in the cognitive bias regarding high-frequency trading – whether you are for or against it. This foils the fact that, as a computer, it should be above the reach of behavioural economics. Instead, thanks to social media, it has become a focus.