Investors flock to loudest, least skilled voices on social media, finds research

Investment advice has become easier to find, with so-called financial influencers — or “finfluencers” — sharing tips and strategies on social media. The quality of that advice, however, is often suspect. A new study shows a more effective strategy would be to bet against the loudest finfluencers.

A paper from the Swiss Finance Institute‘s working paper series tracked data from more than 29,000 finfluencers on financial social media site StockTwits.

“Social media has gained great importance in recent years for sharing and acquiring information,” the paper stated.

“An important question is whether competition among users of social media platforms is such that followers can easily identify skilled […] finfluencers and drive out unskilled finfluencers from the market for social information. We find that the answer is no.”

The researchers — from the University of California, Berkeley, Rice University and the University of Lausanne — found that finfluencers who provided the worst advice were the most active and had the greatest following.

The study classified the finfluencers into three groups: skilled, unskilled and anti-skilled. Just over one-quarter (28%) were skilled, providing valuable investment advice that leads to monthly alpha of +2.6% on average, while 16% were unskilled (advice led to no effect on returns).

The majority (56%), however, were anti-skilled: following their investment advice yielded monthly alpha of -2.3%.

In fact, an investment strategy contrary to the anti-skilled influencers’ recommendations would yield a 1.2% monthly out-of-sample performance, the researchers found.

Yet skill was “effectively ignored” when it came to influence. Skilled finfluencers were less active and also tended to take more negative positions. The anti-skilled most often created overly optimistic beliefs.

“Surprisingly, unskilled and anti-skilled finfluencers have more followers, more activity, and more influence on retail trading than skilled finfluencers,” the paper said.

Why were the anti-skilled viewed as “gurus” while more sober recommendations carried less weight?

The researchers noted the influence of homophily, or the tendency to associate with or trust those who share similar characteristics or values. In this case, homophily led to negative outcomes — what the researchers described as “the wisdom of the anti-skilled crowd.”

“Anti-skilled finfluencers ride return and social sentiment momentum, which coincide with the behavioural biases of retail investors who trade on anti-skilled finfluencers’ flawed advice,” it said.

Rather than gravitating toward better advice and pushing out the bad, the researchers found that homophily leads to the survival of unskilled influencers.

Read the full paper at SSRN.