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RP: Hello there. You can’t get away from social media these days. It’s become part and parcel of modern life. And it holds particular dangers for investors. That’s because of what experts in behavioural finance call social effects.
Tim Richards: We will habitually place more trust in somebody we know, than somebody we don’t know. So, somebody we know gives us a share tip, we’re more likely to act on it, to believe it. In this massively interconnected world we now got, we ascribe the same values to people we don’t actually know but we’re connected to on things like Twitter, Facebook, and other social networks. So those environments actually effectively cause these social biases to get triggered because I am only talking about my successful trades. I never talk about the failed trades. If I got a lot of connections, people will naturally think that I’m a good investor so I produce another tip and then people will start trading on that. And these network effects do happen.
RP: One of the problems with social media from an investing point of view is that most of us naturally want to look good. We certainly don’t want to advertise our mistakes.
TR: We all kind of want to look good. As an individual that’s because, well, that’s all bound up in my ego and the way I want people to think of me. If I’m a professional, it’s all bound up in my ability to actually make a living. There is this thing called self-enhancing transmission bias. And what self-enhancing transmission bias effectively, what I’m gonna do is I’m going to publicise my successes. But, I’m not going to talk about all those trades that went wrong,
I’m gonna kind of forget about those and not talk about them. And because we are impacted by the information we receive, and we don’t think about the information we don’t receive, which is again some form of confirmation bias, that has a major effect. And, the better people are at presenting themselves, the more connections they get - so you can think about this in like a web-connected world if you want - the more connections they get and the stronger those connections, the more that information gets spread out to people. And then you get secondary effects because, I tell you, you tell somebody else, they flag it to somebody else, who tells you again. You get hit with the same information twice but it actually has double the effect.
RP: In short, if you trade on information you find on social media, you're effectively trading on
TR: We can’t avoid being connected to everybody else, we can’t disconnect ourselves and sit in the backroom. So, we have to be aware of it. Ultimately, you just have to continue to go back to the source information. Don’t take anything that’s read, don’t believe anything you are told unless you go back and check it yourself.
RP: Thank you for watching. Until next time, goodbye.
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