Businesswomen using charts on tablet

Social investing: behavioral insights for the modern wealth manager


The new era of social investing represents both a key opportunity and a key challenge for modern wealth managers.


In brief

  • Investors are no strangers to volatility — from the 1637 Dutch tulip speculation to the late '90s dot-com bubble — and the new era of social investing has accelerated both the speed and impact of market fluctuations
  • Investors are now able to rapidly and anonymously communicate trade ideas, which amplifies the influence of behavioral biases – leaving some investors vulnerable to irrational trading decisions
  • As firms continue to develop social investing operating models, they can use behavioral science frameworks to better understand how their client segments are influenced by digital design and choice architecture

1. What is social investing?

Historically, the notion of discussing personal finances with anyone other than an investment professional was considered taboo. However, with only 28% of millennials trusting banks and financial institutions, according to the World Economic Forum, younger generations are flocking to social media apps and forums to discuss investment and trade ideas.

As the wealth gap has continued to grow wider this century, everyday investors have begun to look for alternative, non-traditional channels for advice and guidance.

1. Digital availability

A new generation of investors now have access to financial markets via digital brokerage apps – which aim to make investing more fun and simpler. As of 2018, 69% of adults have access to financial markets globally, a whopping 51% increase since 2011.

2. No-fee trading

As a result of intense competition and new market entrants, trading fees at brokerage firms have been all but eliminated.

3. Social media access

Internet forums and social media apps have given the collective masses the ability to communicate at a scale never-before seen. Today, over 4.1 billion people use social media globally.



Social investing occurs when individuals seek investment recommendations from friends, family and similar others, leveraging collective knowledge to make investment decisions.



2. A new kind of volatility

The rise of social investing over the past decade has led to a new phenomenon: social volatility. Emerging social and investment technology platforms have accelerated both the speed and impact of market fluctuations.

In early 2021, investors on the social media site Reddit banded together to artificially drive up the stock price of a brick-and-mortar video game dealer by over 1,800%. These social investors used follow and chat features to create a boom in multiple "meme stocks," a term which has come to define stocks targeted for social volatility.

While social investing has led to this new form of volatility, the underlying investor behavior is no different — subject to both individual and group biases and blind spots that heavily influence behavior. To illustrate this, we highlight the behavioral phenomena at play along a price chart of one of the stocks that investors targeted in early 2021.

Social investing behavioral insights

Social volatility occurs when investors use social platforms to make coordinated investment decisions that drive market fluctuations at a speed and scale never-before seen.



3. Designing for social investing

With social investing here to stay, modern wealth managers must be prepared to capitalize on the budding opportunity while balancing the fine line of protecting individual investors without restricting any freedoms.

Key questions firms should consider as they develop social investing operating models:

  1. What key features of social investing should be offered by the modern wealth manager?
  2. How can firms identify securities being influenced by social volatility in real time, and what role should this data play?
  3. How can firms ensure that investors are equipped with relevant trading information while not priming the user towards a certain decision or limiting individual freedoms?

To answer these questions, wealth management firms need to understand how their client segments are influenced by digital design and choice architecture. Firms can achieve this by using one of the many established behavioral science frameworks to design evidence-based interventions, or "nudges," as they are commonly called.

Below, we use the MINDSPACE framework (Dolan et al., 2012) to provide a more rigorous breakdown of how firms can use behavioral science to help answer these key operating model questions. MINDSPACE summarizes nine of the most robust and influential automatic effects on human behavior.

MINDSPACE cue

Example questions

M

Messenger

We are heavily influenced by who communicates information

  • Where do each of our client segments tend to seek investment information?
  • Which segments are more likely influenced by perceived experts vs. social networks?

I

Incentives

Our responses to incentives are shaped by predictable mental shortcuts, such as strongly avoiding losses

  • What structural incentives (monetary and non-monetary) are in place that influence client investment decisions?
  • What, if any, incentives have been designed to encourage client financial literacy and understanding of investment risks?

N

Norms

We are strongly influenced by what others do

  • Has the design of our trading platforms intentionally or unintentionally influenced client trading behavior?
  • Are our clients making investment decisions based on perceived social benefits or penalties?

D

Defaults

We “go with the flow” of preset options

  • Do our default option sets protect new investors or put them at risk?
  • Are simplified user flows optimal for all of our user segments?

S

Salience

Our attention is drawn to what is novel and seems relevant to us

  • To what degree should we use active choice to confirm user investment intentions?
  • What is the optimal balance of forewarning effectively without restricting freedom?

P

Priming

Our acts are often influenced by subconscious cues

  • What words, sights and sensations exist within our platform today that influence investment behavior?
  • What subconscious cues can be designed to inform investors of risk without limiting freedom?

A

Affect

Our emotional associations can powerfully shape our actions

  • What images, events and stories trigger automatic behaviors with our client segments?
  • How can we help clients identify these emotional triggers and help to debias them before making trading decisions?

C

Commitments

We seek to be consistent with our public promises

  • What role are commitments playing with our existing client base that may be driving certain trading behavior?
  • How can we leverage commitment devices to help clients behave in ways that are consistent with their intentions?

E

Ego

We act in ways that make us feel better about ourselves

  • How is perceived self-image influencing client investment behaviors?
  • What steps can we take to acknowledge and reward users for behaving in ways that uphold their own beliefs?

To learn more about social investing, download the full article



Summary

Coupled with recent trends to democratize and digitalize finance, it’s easy to see that social investing is here to stay.

As the wealth gap has continued to grow wider this century, everyday investors have begun to look for alternative, non-traditional channels for advice and guidance. Coupled with recent trends to democratize and digitalize finance, it’s easy to see that social investing is here to stay.

The rise of social investing over the past decade has led to a new phenomenon: social volatility. Emerging social and investment technology platforms have accelerated both the speed and impact of market fluctuations. While social investing has led to this new form of volatility, the underlying investor behavior is no different — subject to both individual and group biases and blind spots that heavily influence behavior.


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