How Social Influence Affects Financial Markets

Thanks, everyone, for coming here. And today, I'm going to talk a little bit about my research. And it's about human dynamics and financial markets. How do these two things even connect together? So if we really think about financial markets, thinking about what is driving everything in the financial market, there's a lot of irrational thinking. If you are a trader, a professional, that's what you do. You think about all the information available, and make the best decisions on what to do, what to invest, what stock to allow and what stock to short, right? There's also a lot of irrational psychology behaviors people have been thinking about for a long time. That just, as humans, we have emotions, this irrational part of us. And we often exhibit that in professional life, like investments. But what I'm really interested in is to explore another unique aspect of financial markets. That there are a lot of social influences. You know, in the financial markets, I think it's also one major component of financial markets. And just the nature of human beings, it's all of other research about people talk to each other, and that makes a huge, huge difference. If you don't believe me-- you think people don't talk in the financial market-- you're wrong. So if you have ever sat out on a trading desk-- that is, if you go to a big investment bank, you go to a major asset management company-- you will see someone sitting there, trading on a stock all day. And you would see, beside these fancy screen setups, they have an extremely fancy phone. And that's, you see-- I've circled that. So people keep constantly talking to brokers, to other people, to their buddy in the market, to the other side of the market, and set up their potential deal. So they actually talk a lot. There's a lot of information going through between peers in the investment world. The way I started this research is through a special brokerage firm, which is called the eToro Trading Platform. It's just like E*TRADE, if you like, but basically you can buy and sell securities. For instance, oil; for instance, currencies. On this website, put in some money, and you can trade at a home desk-- wherever you want to. So it's like an online brokerage, an E*TRADE type of brokerage. But what is unique about this eToro Platform-- it's interesting-- is, it creates this Facebook kind of atmosphere on the platform. For instance, you can do two major things on eToro which you cannot do on E*TRADE, or, you know, other online brokerage accounts. The first thing is, you can copy a trade. So you can actually have a screen. Keep going, keep a live update of what other people are trading, what kind of trades other people are placing. And click any of these trades, and you can copy that trade. They other, even more interesting you can do on eToro is, you can mirror some people. That is, you can find some other trader, look at their profile-- just as you look at profiles of other people's Facebook page-- and you can basically copy that trader. Basically, whatever the trader is going to do in the future will be automatically done to your account. So basically, give all your money to that trader, and he acts on your behalf on your money. And that's what we call a mirror kind of behavior. So we can do these two amazing social things on eToro. As a matter of fact, if you're counting all these transaction fees, on average, people who actually mirror the guru traders actually make some money on the platform. People who copy other people's trades make less money, but if you trade a lot, on average you actually lose some money. And you lose the most money among all these three * on different types of trades, which is really, surprisingly large, because if you think about that, social mechanisms really play a role in making money-- making you rich or making you poor. You know, in traditional financial literature, all the pricing theory today we're using every day to price options, we assume this kind of random work, a complete randomness of financial markets. Things move randomly up and down, based on the current information. A lot of randomness. But it's not true. We know that a market is not random. There's up, there's down, there's bubbles, and there's crashes. And we did a lot of research, based on this data. And our major finding is very interesting. It's that we find that, based on the social influence, was a lot of non-randomness, was a lot of market behaviors that can explained not by the irrational thinking, not by certain kind of events happening in the world. But really by people influencing and talking with each other, and getting information from each other. And that's a really-- I think it's a very exciting new idea, new perspective for understanding financial dynamics. Obviously you would ask, what can you do with this kind of information? Can you learn more by looking at people's influences on the financial markets? One so we did is, for instance, you can correlate how people respond by other people's-- how people change their idea, change their mind, after influence by other people. And correspond that with actually the future price movements. And we see with significance that you can predict certain future movements by just looking at how people act on their invest behavior socially. And I think that's the end of this presentation. And that's really where we want to go into, to explain all this mysterious market behavior with a new perspective of thinking. Thank you all.