News Column

Extra: Investors beware as social media affects financial decisions

February 23, 2014

By Nick Vlahos, Journal Star, Peoria, Ill.



Feb. 23--Using social media to help make financial investment decisions is a recent phenomenon, but it might warrant some ancient advice:

Buyer beware. And beware some more.

"This is the Wild West on top of another layer of the Wild West," said Joshua Lewer, a professor in the economics department at Bradley University.

The fast-and-loose nature of the Internet can combine with many Americans' nebulous knowledge about financial markets to produce a toxic investment cocktail, according to Lewer.

"You've got to be careful, because there are sharks out there wanting to take a bite out of you, and they'll use any method, including social media," he said.

That method has become more prevalent in recent years.

Various experiments have attempted to integrate social media and investing. A British hedge fund that used a Twitter-based formula to guide investment decisions came and went.

Last year, the founder of that fund, Paul Hawtin, launched an online trading platform that used Twitter data to measure investment attitudes. According to The Wall Street Journal, the platform offered equity trades, foreign exchange and commodity contracts.

"Today, social media creates a vast amount of information, and it has been proven that the sentiment derived from it can predict stock market movements." Hawtin told the Journal.

Use of Twitter in that fashion wouldn't appear to surprise Heidi Rottier, a BU marketing instructor.

Rottier cited research that revealed the ability of Twitter commentary to affect television ratings. That was particularly true among younger viewers.

"Twitter is a focus group," Rottier said. "It's one of the best market research tools you have, because it's new. It is always where people are."

Documenting where people are regarding products and services can influence consumer purchasing decisions, according to Rottier. But it also can influence investment strategies.

"If I'm seeing all these terrible things in a day about Nike shoes, for example, on Twitter and I'm heading out to buy athletic shoes that day, I'm not feeling good about Nike," Rottier said. "From an investment perspective, if people are seeing that, they might say, 'Nike shoes are not what I want to invest in.'"

Lewer believes social media can generate worthwhile investment information. But the volume, brevity and sometimes contradictory nature of Twitter messages requires they not necessarily be taken at face value. The same is true for Facebook posts and promotions.

- Social media groups that pertain to investing should feature trusted and vetted individuals and sources, Lewer suggested. That can include friends as well as nationally known figures such as CNBC'sJim Cramer and John Bogle, founder of The Vanguard Group investment-management firm.

"You have to be able to filter out good noise from bad noise," Lewer said. "You have to ask yourself, 'What is the motivation behind each of these pieces of information? Is it helpful to me, or is it helpful to someone else?'

"Who's looking out for you? That's the whole thing. ... It'll impact your wallet if you don't watch out."

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Nick Vlahos can be reached at 686-3285 or nvlahos@pjstar.com. Follow him on Twitter @VlahosNick.

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(c)2014 Journal Star (Peoria, Ill.)

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Source: Journal Star (Peoria, IL)


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