Few of us would suspect that the echo chambers that we’re told are pervasive in our social media-dominated times are positive, but perhaps few of us would appreciate just how harmful they are.  Research from the Leeds School of Business at the University of Colorado Boulder attempts to explore how financially harmful they can be to us.

“A financial context is a surprising place to see echo chambers,” the researchers say. “In politics, you can be wrong, but you don’t have to pay a price for it. In finance, if you’re wrong, you pay for it through worse returns—yet we still find echo chambers are pervasive.”

Stock movements

The researchers analyzed data from StockTwits, which is a Twitter-like platform devoted to financial conversations.  The platform also lacks the recommendation engine that is a key part of Twitter to guide people towards certain users and posts.  While one might assume this would result in more balanced consumption, people still seem to find themselves in echo chambers all too easily.

“If I declare in my posts that I’m bullish on Tesla, and then subsequently start following other Tesla bulls, that looks like I’m tilting my information sourcing toward people who agree with me, versus just tilting it toward the topic itself,” the researchers say. “And this is actually pervasive across all kinds of stocks that people discuss on these platforms.”

Worryingly, the study found that those most likely to walk themselves into an echo chamber were also most likely to be active traders.  While the researchers weren’t able to see actual trading data via StockTwits, they were able to posit from the posts people made that there were clear disagreements between people based upon the sources of their information, which in turn seemed to result in very different trading behaviors.

The StockTwits platform is useful as it provides a cross-section of investors among both the professional and amateur communities alike.  The results showed that both groups are susceptible to falling into an echo chamber, albeit the professional traders were not as susceptible as the amateur traders.

“We were always getting interest from people who work in investor behavior and social media, but then this became front page news, with Reddit,” the researchers conclude. “That doesn’t happen too often in academic research, so it has been exciting to see this play out.”