Money:Tech: Social Networks in the Stock Market

Mention “social networks” in a stock market context and most people immediately think of a host of icky prediction sites that try to get people to wager on stocks & markets. Some of that stuff works, most of it doesn’t, but that’s a topic for another day.

What interests me is how tacit social networks emerge among institutional and retail buyers for unusual reasons, like geography. This is a topic at my upcoming Money:Tech conference, and there is some highly interesting work going on in this area, much of it based on Duncan Watt-ish network and small world research from social science, including this 2003 paper by Hong, et al.:

A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

Fascinating stuff.

Related posts:

  1. Social Stock Networks: Coveting Thy Neighbor’s Equities
  2. Stockpickr and Social Stockpicking Networks
  3. Dash.net and Anti-Social Networks
  4. Longest Run in Recent Stock Market History
  5. Hedge Funds and Social Networks

Comments

  1. Dan G says:

    Harrington’s work on diversity in investing clubs is somewhat relevant
    http://www.brown.edu/Administration/News_Bureau/1999-00/99-010.html

  2. mrbubbs says:

    Sounds plausible, but it looks like they didn’t bother to rule out if these companies with overlapping shareholders had been marketing in that particular city.
    They assume that they could disprove the local IR theory because meetings post Reg FD would’t have “inside information” and wouldn’t cause anyone to buy/sell the stock. That’s a lot of hogwash in my opinion — mgmt meetings spark trading because people get comfort or worried about an investment story, and it’s the review of public info and not selective disclosure that is almost always behind these decisions (pre and post- Reg FD).

  3. Paul-
    This is a fascinating subject. A premise that I have built my new company, Cake Financial, upon.
    There is a study by Zoran Ivkovich and Scott J. Weisbenner, published in the July issue of The Review of Financial Studies, that found similar social patterns amongst individual investors. Over all, the professors concluded that “there is strong evidence that individuals’ stock purchase decisions are related to those made by their neighbors.”

  4. doug estadt says:

    Covestor.com has done an elegant nicely thought through version of a social networking investing site.

  5. Doug — Thanks for the note, but a little disclaimer on your post would be nice.