The Research Series: The façade created by profiles

More often than not, we are attracted to certain characteristics in profiles of signal providers (SP) and we may not even realise it!  However, the profile may not necessarily reflect the true ability of the SP. Today, we will look into a research paper that has studied the importance of certain social influences in affecting the decision-making of copiers, mainly social-based signals (which is the primary focus of this particular paper), affect-based and cognition-based signals.

Signals

So, what exactly do these signals  refer to? Social-based signals are signals generated by the community when choosing a trader to copy in a copy trading platform. They include things like the number of followers that the SP has. Affect-based signals indicate whether the SP has similar values with the copier, what kind of emotions he strikes in his followers through his profile. We are basically referring to details in their profiles such as their real names, real profile pictures, or the activity level of the traders. In contrast, cognition-based signals will indicate if the SP is technically competent in his trading tasks. Some signals include factors like the rate of return in a given period, the proportion of profitable transactions or say the highest return an investor has ever achieved.

This study specifically explores the impact of social-based signals beyond affection and cognition-based signals, which are more commonly discussed in other research papers. In order to reduce uncertainty during the selection process, it seems that copiers also consider actions or choices of the members of the social trading network, i.e. social-based signals. Do other followers in the community also copy this trader’s signals? How many people are actually following this trader for prolonged periods of time? Only with the co-existence of these three signals can we establish trust in the SPs.

The Experiment

 Basically, for the research paper, the experiment conducted had subjects make 18 investment decisions in a mock-up social trading platform. Participants have been informed that they should make decisions about which SP’s investment strategy to follow so as to maximize their earnings. They were also instructed on the types of information they would base their decision on, such as name, profile picture, activity level and more. Participants would then act as members of a social trading community and decide on which SP’s investment strategy they would follow when investing their own money.

The following table shows the rules that were used to create positive and negative signals. Positive and negative are basically codes used to differentiate between two extents of the factor mentioned. For instance, under the rule of Name, a positive signal would be a disclosure of the trader’s full name, as opposed to a chosen nickname, which would be coded as a negative signal.

Figure 1. Table 2 in The effects of social-based signals on investment decisions in copy trading, by Sándor Erdős, Tamás Papp and Zsófia Vörös

There are two choices of SPs in the experiment, with their profiles characterized under nine information elements that can be grouped into the three types of signals previously mentioned: affect-based, cognition-based and social-based signals. The variation of positive, negative and missing information profiles defined the 18 different conditions in which participants made their investment decisions .

Results and conclusion

Here’s what we can take home from this study: social-based signals have the potential to influence investment decisions and the results showed a general preference towards positive social profiles. Also, the results of the experiment revealed that when cognition-based and affect-based signals are both positive or negative, it may not matter if the additional-social-based signals are positive or negative, simply an information-rich option is preferred. In fact, the paper proved the addition of social-based signals to be so important that a relatively weak social profile is preferred over a profile that does not have sufficient information provided.

So what’s the point of this study?

To sum it up, signals that reveal how the community of followers in the platform act (i.e. who do they follow) plays an important role in influencing the way you decide on who to follow. Also, having more information alone, is a strong influencing factor in your decisions making as well. What does that tell us, then? It tells us that we often think we know why we choose the traders we think are good for us, but in reality, we might very well just be influenced by all these signals stated in the profiles. This arguably one of the drawbacks of copy trading where profiles of traders are provided to copiers.

So, here’s a tip, do not focus too much on how many people are following the trader, or whether his name is real or if his profile picture catches your eye. Look at the facts given in the profile, such as his trading performance and risk appetite. These are the elements you may want to focus on to see if they match your risk tolerance. All the statistics found in Omada are able to help you narrow down to the SP that suits you the most . We have an article that shares about the information provided on the Omada SP profiles so be sure to check it out!