Beauty-Contests in the age of Financialization: Information Activism and Retail Investor Behavior

Keynes (1936) had rightfully argued that picking stocks is akin to a beauty contest. The chances of winning are amplified if one’s choice matches the likelihood of the panel’s choice. In this era of financialization, where profit-making has shifted to speculative sways rather than fundamental trade and commodity production measures (Krippner 2005), similar beauty contests have become even more acute.Online, real-time media channels along with pervasive investments applications have ushered in unprecedented online financial information and retail investor interest, ranging from dealing in penny stocks to sentiment-based trading. More than information sources, similar investment sites compete to recommend investment directions and strategies, not driven by strict fundamentals used by “arbitrageurs” or rational speculators but on pseudo-signals proffered by various information investment channels with varying degrees of credibility. This behavior, referred to herein as information activism, concomitantlyadds a socio-psychological dimension to the concept of financialization (Lagaorde-Segot, 2016) – wherein technology-driven information reach and range contribute to financial dominance of financial actors and practices.Using information activism as a lens, this research empirically evidences the extent to which informationactivism affects retail investor behavior in various market conditions. This study examines the differentialeffects of two primary, albeit reputable, sources of information activism: an investment news channel(CNBC – Mad Money) and an online financial blog (SeekingAlpha), and the effect on investor behaviorduring the 2008 financial crisis. In identifying the specific downstream effects of information activism oncapital markets and investor behavior, factors related to investor behavior, such as trading volume andprice reaction, are analyzed surrounding information activism events. Results indicate that retail investorsappear to rely on online information activists during uncertain economic conditions. Findings denote thatabnormal returns are associated with information activism during uncertain economic conditions and for buy recommendations when information asymmetry is high. Abnormal trading volume is also associated with information activism during economic uncertainty and with buy recommendations when information asymmetry is high particularly for stocks exchanges where unsophisticated investors tend to trade more heavily