Facebook for Finance: Why do Investors Share Ideas via Their Social Networks?

Abstract

Empirical evidence suggests that investors share price-relevant information via their social networks. I analyze why and under what circumstances skilled investors (“arbitrageurs”) will rationally share private information via this word-of-mouth mechanism. My “diversification” sharing model suggests that capital constrained arbitrageurs will share ideas to gain access to new ideas and lower their portfolio volatility. My “awareness” sharing model suggests that arbitrageurs share their private information to attract additional capital into their asset market. My models make multiple hypotheses about when, where, and how arbitrageurs will rationally share information via their social networks - many of these predictions are observed empirically.