Social Networks in the Stock Market

by: Paul Kedrosky

Mention "social networks" in a stock market context and most people immediately think of a host of icky prediction sites that try to get people to wager on stocks & markets. Some of that stuff works, most of it doesn't, but that's a topic for another day.

What interests me is how tacit social networks emerge among institutional and retail buyers for unusual reasons, like geography. This is a topic at my upcoming Money:Tech conference, and there is some highly interesting work going on in this area, much of it based on Duncan Watt-ish network and small world research from social science, including this 2003 paper by Hong, et al.:

A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth.

Fascinating stuff.