We are humans, not machines. Our social interactions have always served to exchange news, ideas and opinions. In this way, it slowly diffuses through society.
Social media on the rise
But perhaps everything is happening much faster today. That would be plausible above all because an increasing part of communication has migrated to the internet, where ideas - for better or worse - can potentially spread very quickly. Then it would develop like a virus, which is particularly contagious.
A recent study shows that social media is better at capturing investor sentiment about the market and thus predicting returns than traditional media. [1] This was certainly brought to the attention of many investors when the big "mobilisation" to invest in stocks like GameStop occurred via Reddit forums in the spring of 2021. By now, most professionals are also likely to be watching such channels much more closely than before.
Retrieving and analysing data from social media platforms could lead to a better understanding of market participants' sentiment and predict their behaviour. [1]
Another interesting study dealing with the topic is titled "The Rate of Communication". [2] It attempts to estimate an effective transmission rate at which financial messages and assessments move between investors and how this rate varies with investor characteristics.
As a research approach, it matches transactions of 70,000 US households with acquisitions that were cross-industry and financed by equities. Here, it can be assumed that this should be an interesting topic in social interactions for the shareholders in question.
And indeed, the data shows: Investors who get shares in the acquiring company booked seem to communicate this to their local neighbours - because they tend to act in the same direction. The correlation decreases with greater distance between the places of residence. Moreover, the effect does not become apparent as soon as the takeover is announced, but only after the shares have been booked in.
Contagion rate
The authors define a communication rate, which they aptly call the average number of "contagions" of other people. Based on their analyses, they estimate that an "infected" investor infects fewer than one of his neighbours with his investment idea within a quarter, specifically 0.32 neighbours.
This value is statistically significant, so the transmission of financial information through social interaction is quite relevant. However, as with a real virus whose reproduction rate is below one, the whole thing quickly dies off again without further influences instead of spreading exponentially.
To explain this, the researchers write that the spread of ideas and information - unlike that of viruses - is voluntary. Therefore, mere transmission is not enough. Two additional important conditions must be met:
- The sender is motivated to share his idea
- The receiver is willing to listen, take the idea seriously and adopt it
