Online communities foster financial risk??

[Chuckanut]

Here's an article that seems directed at us??

Online communities foster risky financial decisions, Rice study says | TechBlog | a Chron.com blog

 

[MichaelB]

[FONT=&quot]Interesting paper. Thanks for the link.

The abstract

Although consumers increasingly use online communities for various activities, little is known regarding how participation in them affects individuals’ decision making strategies. Through a series of field and laboratory studies, we demonstrate that participation in an online community increases risk seeking tendency of individuals in financial decisions and behaviors. Our results reveal that participation in an online community leads consumers to perceive support from other members, that is they believe they will be helped by other community members should difficulties arise. Such a perception leads online community members to make riskier financial decisions than non-participants. We also discover a boundary condition to the effect: online community members are more risk seeking only when they have relatively strong ties with other members; when ties are weak, they exhibit similar risk preferences as non-members

[/FONT]
The financial web sites that were studied

The researchers – including Utpal M. Dholakia, a professor of management at Rice’s Jones Graduate School of Business – looked at frequent users of both eBay, the popular auction site, and Prosper.com, an online lending community, in three experiments.

[FONT=&quot]If there is any peer pressure here it is probably LBYM.
[/FONT]

 

[justplainbll]

I do not think we are lending each other money nor auctioning off or bidding on merchandise.

 

[JPatrick]

I suppose a few folks here have been lead away from expensive annuities into mutual funds..A bad thing?
I suppose some have been introduced to a financial world that is much bigger than the 401k at mega corp and your money market account. A bad thing?

So long as a person does the apppropriate due diligence, online forums are a tremendous educational tool. Blindly following anyone, anytime--Not so good.

 

[RunningBum]

[FONT=&quot]If there is any peer pressure here it is probably LBYM.
[/FONT]

Yes, this is probably #1, and that's generally good, though sometimes people can be a bit too critical of those who spend more than they would. Maybe not critical, but sometimes I see the attitude of, "I don't know why anyone needs a place bigger than the cardboard box I live in."

The other peer pressure here is to pull the trigger on ER ASAP. I think people are very helpful here to make sure that ER candidates have really figured out their budget, asking questions about whether pensions have a COLA, if medical is really covered, etc. But at times I've seen an attitude that one should ER as soon as you are at the 4% SWR rate. I almost felt apologetic that I wasn't comfortable without a better buffer. I'm a pretty stubborn person so I held out until I was ready. Maybe the peer pressure was really just in the form of encouraging those who were able and wanted to but were afraid that it might not be OK, and nobody is losing sleep over pulling the trigger before being ready. I also see less of that peer pressure now. I suspect a weak economy has made everyone a bit more cautious.

Somebody is probably going to ask me for examples, and like I said recently I haven't seen much of this, and I'm not going to go back and dig through past posts. It's just something I definitely noticed when I first came onboard.

As far as investment risk, I don't see any peer pressure here. The focus is on socking away as much as you can while LBYM, and taking only appropriate risk appropriate for your age and whether you still work. Most here are more risk-averse than me.

 

[brewer12345]

You can see the group think on specific investments on places like the Yahoo stock boards. The posters frequently divide themselves into long and short camps and they encourage each other regardless of the facts.

Here? I think not so much, although I would say there is a broad consensus on things like low cost funds, hatred of annuities, etc., but I don't see people egging on widespread speculation as a matter of course.

 

[MichaelB]

The study says two things: people participating in online communities are greater financial risk takers, and they increase their risk after joining because the community gives them a false sense of security. They use the term "cushion effect".

The other peer pressure here is to pull the trigger on ER ASAP. I think people are very helpful here to make sure that ER candidates have really figured out their budget, asking questions about whether pensions have a COLA, if medical is really covered, etc. But at times I've seen an attitude that one should ER as soon as you are at the 4% SWR rate.

This is a good point. Do I have enough? is a popular question here, and an important one. Even though 4% is viewed by many as safe, I don't think it is a consensus, nor is it viewed as safe here, it's more of a starting point.

It's an interesting paper.

 

[ronin]

I would think that there is a degree of affinity going on. The energy of a group tends to attract those with like energy.

 

[Finance Dave]

I think that was aimed at other sites as mentioned like lending and buying. If anything, this community probably encourages people the other way into LBYM.

 

[GregLee]

If online communities sometimes encourage people to make risky financial decisions, that may be a good thing. The article seems to take "risk" in the popular sense of "downside risk", but some people lose out through not taking on enough risk.

 

[W2R]

[FONT=&quot]If there is any peer pressure here it is probably LBYM.
[/FONT]

When I first arrived here, I was doing some pretty severe LBYM and had been for years. I was planning for the ultimate bare bones retirement and I was doing what I had to do in order to make that happen in ten years on a five figure salary. To me, the peer pressure seemed to be pressure towards (expensive) international travel, buying RV's and/or multiple houses, collecting classic cars, and similar activities that I felt were way beyond my means. I did like finding a few like minded folks that were LBYM'ing, since I hadn't really come across anyone like that in real life for years.

Then my circumstances changed. My net worth now is substantially larger than I ever thought it would be back in 2007.

Now, the peer pressure seems to be in the other direction ... towards LBYM.

My point is that to me, peer pressure here seems to depend upon one's vantage point.

 

[haha]

My point is that to me, peer pressure here seems to depend upon one's vantage point.

I feel sure that you are right. Also, I believe that over the years overall peer pressure here has lessened.

Some very outspoken people have departed, and everyone has been through events to shake the confidence that we know what is best, and even more that we might know what is best for someone else.

To my eye there are no big chiefs here. Many other places there are a few board gurus, usually men, who get catered to by the others. In addition to being annoying, this usually stifles the breadth of opinion that can be expected in that environment.

Ha

 

[MichaelB]

My point is that to me, peer pressure here seems to depend upon one's vantage point.

You make a good point. Also, this is a diverse lifestyle forum, not just about finance, people participate in the topic areas they choose. FIRE and money has the greatest number of threads and posts, but less than half the forum total, and "Other Topics" has almost as many.

In the short time I have been here the forceful feedback has been to discourage people from making overly optimistic FIRE assumptions. The study that Chuckanut linked is interesting and may be relevant to sites like Ebay and propser.com but I do not think it applies to us.

 

[Bestwifeever]

When I first started lurking here (it took years for me to post), the economy was raging and it seemed like most of the regular posters were e-r'd (with the "e" standing for "early 40s"), although their status ranged from a van by the river to homes big enough to need multiple HVAC systems. It did seem that newcomers who posted "can I retire?" got feedback that they should come on in, the e-r water is fine, you can't do wrong by e-r'ing ASAP. I don't remember any encouragement to overspend, just that everyone should e-r immediately regardless.

That outlook has changed a lot since early 2008!

 

[Amethyst]

I feel sure that you are right. Also, I believe that over the years overall peer pressure here has lessened.

If I felt much peer pressure, I would've departed the board long ago. Perhaps it is just that I am in synch with the board "personality," so no pressure is felt.

Many other places there are a few board gurus, usually men, who get catered to by the others.

Ha

I know what you mean...and depending on the interest of the community, it can be a queen bee as well as a big chief. And you'd better cater to the queen bee, or you will get stung. Female-dominated interest groups often demand a great show of saccharine from their members, too. I much prefer a group with men and women.

Amethyst

 

[pb4uski]

Actually, the OP is right. I've had some losses recently and would appreciate contributions to help mitigate my losses. I'm setting up a drop box and will give you all the address shortly so you can send me a check. I appreciate the help. I love this forum!!!!

 

[Chuckanut]

the only peer pressure to pull the trigger and FIRE I have been getting is from friends who are already retired. They sing the praises of lower taxes, more time and the ability to choose how one spends their time.

The only negative pressure is from people who can't retire early. Many took time off in mid-life to pursue various interests, or spent lavishly on sports cars and booze, or borrowed heavily on their home equity which they must now repay, or some combination of the above. Oh well....

 

[CCdaCE]

I'm guessing the generality is that people who participate in any given topic, on any "online community", think they are smarter than they are on that given subject. Maybe that potential is there. But, the fine line is, they are either intelligent and use the info. they get to make an informed or more informed decision, or they think, "I've understood all there possibly is about topic XYZ". Then, they get their ass handed to them on complex issues whether it's investing or rebuilding a transmission from instructions on a different forum.

So, I don't think it's a question of whether you participate in a online community or not, it's how you intake/process/utilize info. Obviously, if you're someone that looks around and sees similar behavior, right or wrong behavior, you're not going to question your own bad behavior for long if its wrong and everyone else is doing it.

-CC

 

[Ed_The_Gypsy]

For me, this board is take-it-or-leave it. I have very modest means. I tune out big houses, airplanes, 2nd homes, tax shelters, etc. Since coming here, I learned much and have become encouraged enough to move some assets from mutual funds to ETFs and a few individual stocks in my business area. It is very different here than on the Yahoo boards.

 

[clifp]

I skimmed the paper. I think the analysis on Ebay is interesting and potentially important.

As a modestly active participant in the Prosper forum during the times that study I can completely agree with characterization that participating in forums were more likely to make you lend money. The person who was looking for $10,000 to consolidate their credit card debt, from the divorce seems like a bad prospect. The same person appear much more like a lot more likely to pay you back after she posts details about all of her hard luck, and the 2 jobs she is working for the last year after she ditched her alcoholic deadbeat ex. Especially after she post adorable pictures of herself and her 6 year daughter.

I think what is stupid is the conclusion that "participating in forums encourages risky financial behavior." I could make strong case the borrowers in Prosper forums made it more likely to get loans, and were better off financially, now us lenders we were worse off.
A far more supportable conclusion is that online forums, exert a form of peer pressure.
I bet folks in AA forums, probably drink less, those in street racing, drive faster, those in option forums trade more options. I am guessing people in this forum make less dumb financial decisions.

 

[grasshopper]

I ER'd in 2006 before I joined the forum. I look at the successes and failures if any, of the group. I have 2 mantras in ER, LBYM and don't spend it all in your first 5 years.

 

[Nords]

I think those researchers would be shocked to learn that the personal-finance bloggers keep egging their readers to stop spending and start saving. Why, if everyone did that then the entire consumer economy would grind to a halt!

The other peer pressure here is to pull the trigger on ER ASAP. I think people are very helpful here to make sure that ER candidates have really figured out their budget, asking questions about whether pensions have a COLA, if medical is really covered, etc. But at times I've seen an attitude that one should ER as soon as you are at the 4% SWR rate. I almost felt apologetic that I wasn't comfortable without a better buffer. I'm a pretty stubborn person so I held out until I was ready. Maybe the peer pressure was really just in the form of encouraging those who were able and wanted to but were afraid that it might not be OK, and nobody is losing sleep over pulling the trigger before being ready. I also see less of that peer pressure now. I suspect a weak economy has made everyone a bit more cautious.
Somebody is probably going to ask me for examples, and like I said recently I haven't seen much of this, and I'm not going to go back and dig through past posts. It's just something I definitely noticed when I first came onboard.

As a timely example, a neighbor & good friend has been planning to retire in "just one more year" after he paid off their mortgage. He's a retired 30-year Army CW4 and he's fairly high up in the GS ranks. He's in his mid 60s and plans to keep on working until age 66 or 67.

We got a call Wednesday from his spouse that he's had a stroke (or cerebral hemorrhage) and is in the ICU. We haven't heard from her (or their family) since. We're hoping that no news is good news, but we just don't know yet.

 

[chinaco]

I believe it.

If it were worded a little differently... "Online forums can influence decisions and actions". Few would disagree with that one.

 

[HFWR]

It must be true; I saw it on the internet!

 

[Ed_The_Gypsy]

I am guessing people in this forum make less dumb financial decisions.

Maybe, maybe not. It ain't me, babe.