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How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme

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  • VILLE RANTALA

Abstract

A unique data set from a large Ponzi scheme allows me to study word‐of‐mouth diffusion of investment information. Investors could join the scheme only by invitation from an existing member, which allows me to observe how the idea spreads from one person to the next based on inviter‐invitee relationships. I find that the observed social network has a scale‐free connectivity structure, which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading Ponzi scheme. I further find that investors invest more if their inviter has comparatively higher age, education, and income.

Suggested Citation

  • Ville Rantala, 2019. "How Do Investment Ideas Spread through Social Interaction? Evidence from a Ponzi Scheme," Journal of Finance, American Finance Association, vol. 74(5), pages 2349-2389, October.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:5:p:2349-2389
    DOI: 10.1111/jofi.12822
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    Cited by:

    1. Yanjiang Zhang & Hongyi Fan & Qingling Liu & Xiaofen Yu & Shangming Yang, 2023. "How a Short-Lived Rumor of Residential Redevelopment Disturbs a Local Housing Market: Evidence from Hangzhou, China," Land, MDPI, vol. 12(2), pages 1-15, February.
    2. Erol Akçay & David Hirshleifer, 2021. "Social finance as cultural evolution, transmission bias, and market dynamics," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 118(26), pages 2015568118-, June.
    3. Ganglmair, Bernhard & Holcomb, Alex & Myung, Noah, 2020. "Expectations of reciprocity when competitors share information: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 244-267.
    4. Umar Farooq & Mosab I. Tabash & Ahmad A. Al-Naimi & Krzysztof Drachal, 2022. "Corporate Investment Decision: A Review of Literature," JRFM, MDPI, vol. 15(12), pages 1-17, December.
    5. Da Ke, 2021. "Who Wears the Pants? Gender Identity Norms and Intrahousehold Financial Decision‐Making," Journal of Finance, American Finance Association, vol. 76(3), pages 1389-1425, June.
    6. Farrell, Michael & Green, T. Clifton & Jame, Russell & Markov, Stanimir, 2022. "The democratization of investment research and the informativeness of retail investor trading," Journal of Financial Economics, Elsevier, vol. 145(2), pages 616-641.
    7. Shuyu Zhang & Dunli Zhang & Jianming Zheng & Walter Aerts & Dandan Xu, 2023. "Plus Token and investor searching behaviour – A cryptocurrency Ponzi scheme," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4713-4728, December.
    8. Chen, Zhang-HangJian & Wu, Wang-Long & Li, Sai-Ping & Bao, Kun & Koedijk, Kees G., 2024. "Social media information diffusion and excess stock returns co-movement," International Review of Financial Analysis, Elsevier, vol. 91(C).
    9. Suwan (Cheng) Long & Brian Lucey & Ying Xie & Larisa Yarovaya, 2023. "“I just like the stock”: The role of Reddit sentiment in the GameStop share rally," The Financial Review, Eastern Finance Association, vol. 58(1), pages 19-37, February.
    10. David Hirshleifer, 2020. "Presidential Address: Social Transmission Bias in Economics and Finance," Journal of Finance, American Finance Association, vol. 75(4), pages 1779-1831, August.
    11. Li Huang & Oliver Zhen Li & Yupeng Lin & Chao Xu & Haoran Xu, 2021. "Gender and age-based investor affinities in a Ponzi scheme," Palgrave Communications, Palgrave Macmillan, vol. 8(1), pages 1-12, December.
    12. Antler, Yair, 2023. "Multilevel marketing: pyramid-shaped schemes or exploitative scams?," Theoretical Economics, Econometric Society, vol. 18(2), May.

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