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About the fear of reputational loss: Social trading and the disposition effect

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  • Pelster, Matthias
  • Hofmann, Annette

Abstract

This article studies the relationship between giving financial advice and the disposition effect in an online trading environment. Our empirical findings suggest that leader traders are more susceptible to the disposition effect than investors who are not being followed by any other trader. Using a difference-in-differences approach, we show that becoming a first-time financial advisor increases the disposition effect. This finding holds for investors who engage in foreign exchange trading and for investors who trade stocks and stock market indices. The increased behavioral bias may be explained by leaders feeling responsible to their followers, by a fear of losing followers when admitting a poor investment decision, or by an attempt by newly appointed leaders to manage their social image and self-image.

Suggested Citation

  • Pelster, Matthias & Hofmann, Annette, 2018. "About the fear of reputational loss: Social trading and the disposition effect," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 75-88.
    • Handle: RePEc:eee:jbfina:v:94:y:2018:i:c:p:75-88
    DOI: 10.1016/j.jbankfin.2018.07.003
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    Cited by:

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    6. Zeeshan Ahmed & Shahid Rasool & Qasim Saleem & Mubashir Ali Khan & Shamsa Kanwal, 2022. "Mediating Role of Risk Perception Between Behavioral Biases and Investor’s Investment Decisions," SAGE Open, , vol. 12(2), pages 21582440221, May.
    7. Jose Apesteguia & Jörg Oechssler & Simon Weidenholzer, 2020. "Copy Trading," Management Science, INFORMS, vol. 66(12), pages 5608-5622, December.
      • Jose Apesteguia & Jörg Oechssler & Simon Weidenholzer, 2018. "Copy Trading," Working Papers 1048, Barcelona School of Economics.
      • Jose Apesteguia & Jörg Oechssler & Simon Weidenholzer, 2018. "Copy trading," Economics Working Papers 1615, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 2019.
    8. Gianluca Vagnani & Francesco Mazzurco, 2022. "Incidental Negative Life Events and the Disposition Effect at the Individual Level," Journal of Finance and Investment Analysis, SCIENPRESS Ltd, vol. 11(2), pages 1-1.
    9. Schneider, Julian & Oehler, Andreas, 2021. "Competition for visibility: When do (FX) signal providers employ lotteries?," International Review of Financial Analysis, Elsevier, vol. 78(C).
    10. Mikhail Freer & Daniel Friedman & Simon Weidenholzer, 2023. "Motives for Delegating Financial Decisions," Papers 2309.03419, arXiv.org, revised Dec 2023.
    11. Geetika Madaan & Sanjeet Singh, 2019. "An Analysis of Behavioral Biases in Investment Decision-Making," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 10(4), pages 55-67, July.
    12. Florian Röder & Andreas Walter, 2019. "What Drives Investment Flows Into Social Trading Portfolios?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(2), pages 383-411, July.
    13. Steiger, Sören & Pelster, Matthias, 2020. "Social interactions and asset pricing bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 503-522.
    14. Xuejun Jin & Jiawei Yu, 2022. "Does communication increase investors’ trading frequency? Evidence from a Chinese social trading platform," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-32, December.
    15. Erdős, Sándor & Papp, Tamás & Vörös, Zsófia, 2022. "The effects of community-based signals on investment decisions in copy trading," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 97(C).
    16. Rau, Holger A., 2021. "Time preferences in decisions for others," Economics Letters, Elsevier, vol. 200(C).
    17. Jin, Xuejun & Li, Hongze & Yu, Bin & Zheng, Yijing, 2023. "How does the COVID-19 pandemic change the disposition effect in fund investors?," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    18. Dalla Costa, Aldo Fortunato & Mollica, Vito & Singh, Abhay, 2021. "Payment methods and the disposition effect: Evidence from Indonesian mutual fund trading," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    19. Liêu, L.M. & Pelster, M., 2020. "Framing and the disposition effect in a scopic regime," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 175-185.
    20. Maheshwari H & Anup K. Samantaray & Jyoti Ranjan Jena, 2023. "Unravelling Behavioural Biases in Individual and Institutional Investors Investment Decision- making: Intersection of Bibliometric and Systematic Literature Review," South Asian Journal of Business and Management Cases, , vol. 12(3), pages 275-299, December.
    21. Andreas Oehler & Julian Schneider, 2023. "Social trading: do signal providers trigger gambling?," Review of Managerial Science, Springer, vol. 17(4), pages 1269-1331, May.
    22. Riccardo Reith & Maximilian Fischer & Bettina Lis, 2020. "Explaining the intention to use social trading platforms: an empirical investigation," Journal of Business Economics, Springer, vol. 90(3), pages 427-460, April.
    23. Minh-Lý Liêu, 2021. "Peer attention and the disposition effect," Working Papers Dissertations 81, Paderborn University, Faculty of Business Administration and Economics.

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    More about this item

    Keywords

    Social trading; Peer advice; Disposition effect; Online trading platforms;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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