Risky bets – democratising financial information through social media
Social media has become entrenched into daily life. This brings many benefits, but also potential financial market and insurance sector risks.
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Social media and financial markets
Social media (SoMe) platforms like X (formerly Twitter), LinkedIn and Reddit have democratised the flow of financial information. Individuals, regardless of their expertise, can now access financial market information in real time, and exchange ideas much more easily and inexpensively. As such, they are empowered to make more informed investment decisions.
The combination of social media (SoMe) and online stock trading has boosted the participation of retail investors by providing quick access to information and speeding up the process of purchasing and selling shares. In addition, there is the benefit of education: a wide range of resources available on SoMe platforms help lower the barriers to entry for retail investors. A recent report said that 34% of retail investors have made at least one change to their investments in response to information garnered from SoMe.1 Another study said that almost 249 institutional investors (out of 256) utilise SoMe for professional purposes, with 80% using it daily.2 Around 30% said that the information they gather on SoMe has had a direct impact on their investment recommendations and decisions.
SoMe platforms have also been used to spread misinformation (eg, “pump and dump” schemes3) and to manipulate human behaviour. The risk of (mis)information overflow can impede effective decision-making and increase the likelihood of cognitive biases influencing investment decisions. False rumours and malicious intent can lead to significant (short-term) market volatility and cause financial losses for unsuspecting investors.
Herding at speed
The speed at which SoMe disseminates news does have disadvantages too. The collapse of the Silicon Valley Bank (SVB) in March 2023 was dubbed the world’s first “Twitter-fuelled bank run”.4 Customers, prompted by viral panic on SoMe platforms, withdrew USD 42 billion in a single day from SVB, leaving it with a USD 1 billion negative cash balance. Bank runs like this typically lead to increased claims in D&O and credit and surety insurance.
SoMe platforms can also create “herd mentality”, where investors follow popular trends without conducting proper due diligence. In 2021, the “wallstreetbets” community on Reddit caused prices of meme stocks (eg, GameStop5) and cryptocurrencies to surge. While some members profited on the way up, many suffered heavy losses when the party ended (very abruptly). This has led to increased discussion on how securities regulation should be adapted to the modern era of investor behaviour and digital information exchange.6
Social media benefits for the insurance sector
Insurers can use SoMe data to complement their traditional risk assessment methods, and to help identify new emerging risks. SoMe may also support tailoring and marketing of insurance products, and the identification of claims inconsistencies and fraud (eg, in personal injury claims).7 Estimates put the cyber insurance protection gap at around 90%.8 Corporate demand for cyber insurance will likely rise given the increased potential for cyberattacks via SoMe channels.9
references
References
1 E. Duré, Social media’s influence on the investing community, J.P. Morgan Wealth Management, Jan. 2024.
2 Z. Haqueet al., A unified framework for exploring the determinants of online social networks (OSNs) on institutional investors’ capital market investment decision, Technology in Society, Aug. 2022.
3 In a pump and dump scheme, fraudsters typically spread false or misleading information to create a buying frenzy that will “pump“ up the price of a stock. They will then “dump“ the stock by selling their own shares at the now inflated price. Source: Investor.gov U.S. Securities and Exchange Commission.
4 SVB collapse was driven by ‚the first Twitter-fueled bank run’, CNN, 14 March 2023.
5 E. Lopatto, How r/WallStreetBets gamed the stock of GameStop, The Verge, 27 Jan. 2021.
6 K. Catalano, Regulatory Lessons from the Meme Economy, The Regulatory Review, 22 Dec. 2021.
7 A. Stark, Leveraging social media research in the claims investigation process helps fight fraud, mitigate risk and reduce cost, Guidewire, 15 Aug. 2022.
8 E. Cellerrini et al., Cyber insurance: strengthening resilience for the digital transformation, Swiss Re Institute, 7 November 2022.
9 J. Ryan, Record number of phishing sites impersonate social media to target victims in Q4, Fortra Phishlabs, 8 Feb. 2024.
