The Success of Others: Copy Trading and Risk

Social trading platforms and day trading apps are increasingly popular. They allow copy trading which means that trades of another trader are automatically copied. Traders can provide credentials, which has been shown to make them seem trustworthy. These features have been shown to increase the tendency of inexperienced users to take risks. We present the design and preliminary results of an experimental study that investigates whether the negative externalities of social trading can be alleviated if the corresponding trades have to be executed actively. In the experiment, the users observe the trading behavior and success of anonymous other users and are then asked to take investment decisions without being able to automatically trade as the observed investors. Pretest results indicate that having to execute the investment decisions themselves might reduce the tendency to take risky decisions. This is a promising avenue for the regulation of day trading apps.