Newcomers to the world of social finance – whether they be tech entrepreneurs or non-financial professionals – are often surprised by the apparent willingness of analysts and traders to share their ideas with other online community members.
They're skeptical because they can't understand why sophisticated investors would trust the input of someone else who'd be willing to share their best ideas without being compensated. The more cynical of these onlookers see the investing world as inhabited by two categories of potential scoundrels:
rumor-mongers, who pedal in gossip, in order to rally unsuspecting investors behind their long or short positions (more about this group in a moment); and
legitimate investors, who are more than happy to "talk their book," in order to enlist the support of others, encouraging them to join their side of the trade.
The sense of puzzlement expressed by observers of online finance is understandable. The tumultuous financial events of the last decade left many individual investors feeling guarded. It comes as a surprise to these individuals when "sophisticated" investors appear willing to entrust others with their ideas.
I entered the financial profession during the early-1990s. The market professionals I worked with carefully guarded the insights and information they considered to be proprietary. The recent popularity of financial websites based on collaboration and sharing therefore seemed surprising to me – at least, initially.
While financial firms still keep tight wraps on their processes and systems, many traders now appear surprisingly willing to loosen those restrictions, when it comes to sharing content, such as financial forecasts and investment analysis.
Open-sourced approaches to finance became popular in the years immediately preceding the 2008-2009 Financial Crisis. Several collaborative investing applications, such as Wikinvest, began to emerge at that time.
One new startup – a New York-based wiki-type platform called Thinknum – "allows users to share and collaborate on financial models without requiring them to email complex spreadsheets," according to DealBook .
It wasn't until the Financial Crisis began to ease that investor crowdsouricng reached its full stride. The traders who post their ideas and projections on StockTwits, Estimize, SumZero, and Harvest are willing to share ideas – when the act of sharing serves their own long-term interests.
Stock analysts, traders, and investors didn't readily embrace the online sharing ethos, observes Leigh Drogen, the CEO of Estimize. Drogen, a veteran of StockTwits, recalls how he "fought so hard during [his] years at StockTwits to get people to accept the fact that guys ... were providing amazing information."
Drogen and his colleagues had to overcome the tainted reputation of the Yahoo Message Boards as "a free for all garbage pile of pump and dump and rumors." As he notes, "people just remembered Yahoo Finance message boards and didn’t believe it was possible to get good info from someone without a real name attached."
The dichotomy between the proprietary culture of old-school traders on Wall Street, and the free-wheeling openness more recently displayed by online stock commentators, reminds me of similar contrasts observed in the world of technology.
Whereas the founders of Microsoft and Apple carefully guarded their software innovations, the developers of open-source software adopted a different approach.
In his recent book, The Innovators , author Walter Isaacson describes the work of Linus Torvalds, the software engineer who became the principal architect behind the development of the Linux operating system. Described by some as the "anti-Gates," Torvalds embraced an open-source development approach.
While trading stocks ostensibly has little in common with developing software, Torvalds explained the motives behind open-source software development in terms that could just as readily have been used to describe the motivations of social finance contributors.
"Money is not the greatest of motivators .... Folks do their best work when they are driven by passion. When they are having fun. This is as true for playwrights and sculptors and entrepreneurs as it is for software engineers .... Hackers are also motivated ... by the esteem they can gain in the eyes of their peers by making solid contributions .... Everybody wants to impress their peers, improve their reputation, elevate their social status."
The idea- and data-sharing openness displayed by members of StockTwits, Estimize, and SumZero might also stem from a deeper sense of self-interest: a conviction that traders become smarter when they work together to create better investment models and techniques.