A recent study indicates that investors who experience fluctuations in their follower counts, whether positive or negative, tend to underperform compared to their pre-change performance. This holds true regardless of whether they are excited by new followers or worried about losing existing ones.
The study analyzed activity on social investment websites, where individuals trade assets, including digital currencies, and build audiences based on their trading success – similar to a YouTube channel but focused on investments.
Researchers discovered that both increases and decreases in follower numbers prompted investors to engage in more frequent and riskier trading decisions. As a result, traders saw their performance decline by approximately 10% in the weeks following a change in their follower base.
According to Dr. Liangfei Qiu, a professor at the University of Florida’s Warrington College of Business and co-author of the study, “A significant increase in followers can create a sense of overconfidence. This leads to more aggressive trading, ultimately hurting future investment outcomes.”
Dr. Qiu continued, “We initially hypothesized that a decline in followers would reverse this effect, reducing overconfidence and leading to improved trading. However, our findings showed the opposite. A decrease in followers resulted in even more aggressive trading and further deterioration of investment performance.”
Dr. Qiu, in collaboration with researchers from the University of Maryland and the University of Washington, analyzed data from an unnamed social trading platform to understand how gains or losses in followers impacted cryptocurrency trading behavior and results.
The study highlights the powerful influence of social dynamics in trading. While the research focused on the cryptocurrency market, which is known for its volatility and can amplify risks associated with social trading, the potential for follower-driven behavior to negatively impact investments also applies to traditional assets like stocks and bonds.
The researchers emphasize the need for both platforms and individual investors to be aware of and mitigate these potential drawbacks.
“If platforms overemphasize the social aspects, it could ultimately be detrimental, negatively impacting the platform’s long-term performance,” Dr. Qiu warned. “Investors need to recognize their own biases and ensure that their investment strategies are not unduly influenced by social attention.”