Is Human-Interaction-based Information Substitutable?

We investigate information substitutability in the financial market using a quasi-natural experiment: the pandemic-triggered lockdown that has restricted people’s physical interactions, affecting their ability to collect, process, and transmit interaction-based information. By leveraging cross-sectional and time-series variations in the lockdown and its impact on proximate investment, we explore how the challenges of gathering information through physical interactions have led to a shift towards electronic interactions, including both synchronous interactions like virtual meetings and asynchronous ones such as collecting information from the internet. We show that funds that relied more on physical interactions for information before the pandemic experienced even worse performance than other funds during the lockdown. The loss of their information advantage prompted these funds to rebalance portfolios towards distant stocks, aiming to diversify portfolios and reduce risk. These results suggest that physical-interaction-based and electronic-based information are not fully substitutable. Furthermore, we identify the origin of the advantages of human-interaction-based information as stemming from physical contacts, primarily in venues such as cafes, restaurants, bars, and fitness centers. Additionally, we demonstrate that the virtual world based on Zoom/Skype/Teams can provide a buffer but cannot fully replace in-person meetings in generating sufficient information.