consumers

Online communities encourage risky decisions

RICE (US) — People who participate in online communities are more likely to make risky financial decisions, new research shows.

The study, published in the Journal of Marketing Research, examined the behavior of people participating in message boards and chat rooms on the lending website Prosper.com and the auction website eBay.com.

“Emerging evidence indicates that online community participation impacts many aspects of consumer behavior, and our findings reveal that this impact extends to financial decision-making,” says Utpal Dholakia, professor of management at Rice University.

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“Participants in these sites somehow come to believe that their fellow community members will come to their aid when something goes wrong, but in reality, they are out there on their own and could suffer adverse consequences.”

Other findings include:

  • On the peer-to-peer lending site Prosper.com, an 18-month study of 600 lenders showed that those who participated in online communities possessed riskier loan portfolios and lent their money to borrowers with worse credit ratings and greater chances of default compared to those outside the online community.
  • In a controlled field experiment conducted with more than 13,000 eBay customers over a two-year period, those who joined the online community engaged in riskier bidding behaviors by placing more bids on each item and spending more for items they won.
  • Online community participants tend to believe that the community will support them in difficult situations, and this perceived support causes them to make riskier financial decisions.
  • The more active the participants are within the online community, the riskier their financial decisions tend to be.

These effects are stronger when the main topics of conversation of the online community are related to investing/bidding issues rather than socializing.

“These communities are different from social networking sites like Facebook, because the individuals involved are usually strangers whose identities are unknown to the consumer,” Dholakia says.

The study’s main finding that online community participants engage in riskier decision-making is widely applicable and important, Dholakia says, similar to individuals who join an online support group run by a hospital, foundation, or advocacy group or members of an online adolescent club.

“This may lead to patients choosing riskier treatment options or engaging in high-risk behaviors, some of which could prove detrimental.”

Because greater risk-taking is usually associated with a greater likelihood of loss, online communities may lead consumers to act in ways that are harmful to not only them personally.

“If, for example, members of a discount brokerage firm’s online community invest more aggressively by buying riskier stocks that perform worse than market averages, this would affect them adversely and also hurt the firm’s standing and brand name.”

Researchers from the University of British Columbia and the University of Zurich contributed to the study.

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