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“Social Investing”, Herd Mentality, and the Stock Market

Social investing has picked up my interest lately. I plan to review and track services in this area, as they become available and improve.

Few areas of web 2.0 elicit as much controversy as “social investing”, loosely defined as services that add a social network twist to online financial and investing information. Socialpicks and Stockpickr, for instance, help subscribers share, track, and rank recommendations on stock picks and other investments.

The opinionated response to social investing on the blogosphere reveals a lot about people’s attitude with money and investing, especially among the educated techno-savvies. For instance, the theory of efficient markets seems to have many proponents, who dismiss social investing as a lesser information aggregation tool on a particular stock than the broader stock market. Although stock picking seems bound to produce poor results, some upstarts will find success in this area, because investing has a fair social component to it and because advertisers are aggressively chasing affluent investors.

I plan to review and track these services along the factors that will key to their success.

To succeed as a media, these Internet services will have to blend user-generated content, eye candy, and public information into content more entertaining and/or informative than Google, Yahoo!, or existing financial newsletters.

These services will also have to reconcile three tensions:

- Spam-free community – the community is the bread and butter of websites relying on user-generated content. As they outgrow their core community, these services will become an increasingly attractive conduit to promote one-cent stocks and dubious investment strategies;

- Manipulation-free ranking and rating – ranking is critical to help users assess and prioritize information. The worst possible type of ranking would be limited to user rating (whether explicit a la Digg or implicit a la Google  pagerank). There are a set of challenges to overcome to make rating/ranking effective: historical performance requires looking at at least a few years of historical data; mid/long-term success requires more than sheer luck, so the ranking mechanism should somehow match a recommendation’s success with a stated strategy; longer term, I would also be concerned about ranking fraud (similar to what eBay has experienced as a marketplace): people building up their ranking/rating on innocuous wins and using it at once to influence market sentiment.

- Silo-free audience and content – there already is an overload of financial information on the web: these services will become truly successful if they reach beyond their own boundaries.