Ignore Investment Tips from Stock Message Boards, Say Researchers



  • Virtual communities have the potential to offer broad information about stocks.
  • Stock message boards are no more or less accurate than analysts.
  • Individual investors, though, pay attention only to information that confirms views they already hold.

Sell IBM today. In fact, sell it now.
$131.80. It ain't gettin' better than that.
Life is great.

Sentiment: Strong Sell

This confident and cheery posting on Yahoo! Finance on August 9, 2010, is from anonymouse1. Who is that, you ask? Well, it could be anyone — just fill in the blank with your own desired reality. A seasoned and successful investor...a loose-lipped insider...or simply someone who likes to chat and share opinions?

While many investors are flocking to virtual message boards and communities (41.4 million visitors to Yahoo! Finance in May 2010), four researchers warn that the boards are actually detrimental to investors.

Prabhudev Konana, Alok Kumar, Raj Raghunathan and Bin Gu are Ph.D. researchers in marketing, finance and information systems at The University of Texas at Austin and the University of Miami. They claim message boards cause good investors to make bad decisions.

"It's not as simple as saying, 'Well, it is harmless entertainment,'" says researcher Kumar. "There is real risk you will be influenced by the 'noise' and begin to amplify your own investment biases."

The Pros and Cons of Crowd Sentiment
The problem is not information accuracy. Prior studies have shown virtual communities are often more accurate than analyst forecasts (Enron's collapse was first reported on message boards). Recognizing value in crowd sentiment, PredictWallStreet, Marketwatch and others have started to aggregate investment sentiments from message boards and blogs for professional investors.

So what is the danger?

"Individual investors exhibit what is called confirmation bias," says Konana. "They select and read information that conforms to their own preconceived biases, and as a result they actually become more confident in their opinion and trade more frequently, but with lower overall returns."

This runs counter to the concept that investors are rational information gatherers. "Behavioral finance studies tell us investors are subject to all manner of psychological biases," he says. "And message boards contribute to these biases, actually amplifying them, particularly for investors with strongly held opinions."

Bears grow more bearish, bulls turn even more bullish, and trading frequency rises, along with greater trading cost. So these four researchers say, "Just ignore the boards, it's as simple as that."

Research Specifics
Using data from a stock message board (sanitized to protect investor identities), the researchers studied how investor behavior changed in response to their use of message boards. Volunteers were solicited from users of Naver, the largest online portal website in South Korea. After the volunteers completed a survey about their investment behavior and opinions, the researchers followed the users' patterns of accessing posts on the site, and their degree of acceptance of the advice. Investors tended to click on messages consistent with their prior beliefs, and to accept opinions with which they already agreed.

"Other studies have shown similarities in investor behavior across cultures," says Kumar, "So it is reasonable to expect that the results can be generalized to other markets, including the United States."


The University of Texas at Austin - Red McCombs School of Business

Joint appointment, The University of Texas at Austin - Red McCombs School of Business, and the University of Miami - School of Business Administration


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Faculty in this Article

Alok Kumar

Former Associate Professor of Finance Mccombs School of Business

Bin Gu

Assistant Professor, Department of Information, Risk, and Operations Management McCombs School of Business

Prabhudev C. Konana

Professor, IROM

Prabhudev Konana is the Chairman of the Department of Information, Risk, and Operations Management and is a University Distinguished Teaching...

Prabhudev C. Konana teaches in the Texas Executive Education program, featuring open enrollment, custom and certificate classes for executives and organization teams.

Raj Raghunathan

Professor, Marketing

Raj Raghunathan earned his Ph.D. from the Stern School of Business at New York University. His work juxtaposes theories from psychology,...

About The Author

David Wenger

Director of Communications, McCombs School of Business

David Wenger is the director of communications at the McCombs School of Business. He writes primarily on topics of innovation, competition and human...

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