Trusting the Social Media

Abstract

The growth of social media has transformed how information is transmitted in the financial markets. It has impacted its primary users, the household investors' decision making on the stock market. Through Prospect theory, the household investors' unconditional trust in the social media for investing advice is extracted as a commonality between the social media and market sentiments. This is found to be pro-cyclical since 1998 when social media started but has been increasing from 2008 to 2016. This increasing unconditional trust however did not translate to increased household stock market participation as evidenced by the Survey of Consumer Finance. Instead, households' participation correlated with trust in the social media conditional on what they read in the news headlines and their increased risk aversion post 2008 crisis as studied in \cite{Guiso18}.

Keywords: Household finance, market sentiment, natural language processing, trust, social media, prospect theory, stockholding puzzle

JEL Classification: D10, D12, G40, G41