Membership in lending and auction sites can mean risky financial decisions

People who participate in the message boards, chat rooms and discussion forums of online lending and auction sites such as Prosper.com and eBay are more likely to make risky financial decisions, according to a new study.

The study is slated for publication in the Journal of Marketing Research; its authors are from Rice University, University of British Columbia and University of Zurich.

In a press release, Utpal Dholakia, professor of management at Rice University and one of the study's authors, stated that: "Emerging evidence indicates that online community participation impacts many aspects of consumer behavior, and our findings reveal that this impact extends to financial decision-making."

The researchers contend that individuals who were active participants in the message boards, chat rooms and social forums of these sites perceived a support system that went with that activity, and tended to believe that the community would support them in difficult financial situations, thus causing them to make riskier financial decisions. In addition, the more active the participants were, the riskier their financial decisions were likely to be. When those connections were weak, members were more risk averse.

Additional findings from the study include:

• On the peer-to-peer lending site Prosper.com, a study of 600 lenders conducted over an 18-month period showed that those who participated in discussion forums possessed riskier loan portfolios and lent their money to borrowers with worse credit ratings and greater chances of default than nonparticipants.
  
• In a controlled field experiment conducted with more than 13,000 eBay customers over a two-year period, those who joined the chat rooms and message boards of the auction site placed more bids on each item and spent more for items they won.
  
• These effects are stronger when the main topics of conversation of the online community are related to investing or bidding issues rather than socializing.

Does Online Community Participation Foster Risky Financial Behavior? [Social Science Research Network]
Online interactions can lead to risky financial decision-making [Rice University]

—Maggie Shader