How to resist the nudge to invest by rumour

A FRIEND mentions a counter that is likely to double in three months. The same name comes up at golf the following weekend, and again over the phone with a former colleague. He even forwards a chart with a green arrow on it.

There is a mad rush to key in the buy order. The investor believes he has triangulated three independent signals. He has heard one rumour travel through three branches of the same network.

In 2008, four economists – Jeffrey Brown and Scott Weisbenner of the University of Illinois, Zoran Ivkovic of Michigan State University and Paul Smith of the Federal Reserve Board – published research in the Journal of Finance examining how community stock ownership shapes individual decisions to participate in the market.

A 10-percentage-point rise in the share of a person’s neighbours who owned stocks lifted that individual’s probability of owning stocks by roughly four percentage points.

The effect was stronger in more sociable communities where people talked to each other.

Informational cascade

The researchers were able to isolate social influence itself, rather than picking up shared wealth or local economic conditions. People were following each other.

In Singapore, the same forwarded chart can move through a family group, a desk chat and an alumni thread within hours. It arrives three times, but it is still the same rumour.

In a smaller country with denser networks, the same conversation can reach an investor through three different relationships in the same week.

Researchers call this an informational cascade. Each person follows because they assume the people ahead knew something they did not.

The third person repeating the rumour is not necessarily adding new information. He may simply be copying the first two.

Singapore regulators have noticed. Singapore Exchange Regulation (SGX RegCo) issued a warning in December 2020 about pump-and-dump activities exploiting Telegram chats and other social media channels, in which members were nudged into buying specific counters together.

The Monetary Authority of Singapore and SGX RegCo followed with a joint advisory in February 2021 about trading activity incited by online discussions, citing investor interest in the GameStop and AMC episodes in the United States and the risk of similar speculative activity here.

The advisory cautioned that those nudged into buying could be left holding losses when the original promoters sold out. Ordinary public information was being repeated until it sounded like consensus.

Fear of missing out

The investors I speak with are intelligent people. Many of them have a clear sense of what they are trying to do with their money.

Then a name comes up at dinner, in a chat or in passing; within a few hours, they are looking at the chart. By the next morning, they are in. The strategy they had built up over years dissolves into a trade they would not have considered the day before.

When I ask them later what made them buy, the answer is almost never about the company. It is about who mentioned it.

These are not greedy investors. They do not chase returns. They simply do not want to be left out of something the people around them are talking about.

The fear of being the one who missed it carries more weight than any analysis of the trade itself.

Even experienced traders fall into this. A 2007 field experiment by Alevy, Haigh and List, published in the Journal of Finance, ran tests with market professionals from the Chicago Board of Trade. The professionals followed the crowd alongside the student control group, and the pattern only broke when new, verifiable information arrived from outside the sequence.

A 2023 study published in Scientific Reports, by Sandra Andraszewicz, Daniel Kaszas and Christoph Holscher of ETH Zurich and the Singapore-ETH Centre, with Stefan Zeisberger of the University of Zurich, ran an experiment with 807 experienced retail investors on a simulated trading platform.

When investors were shown how the top performers were doing, they took more risk, traded more often and were less satisfied with their own returns.

It was not envy. Seeing others do well changed what felt normal.

The same dynamic shows up in chat groups, where one person’s screenshot of a profitable trade quietly resets what the rest of the group considers a reasonable bet.

Once that anchor moves, the question is no longer whether to act, but by how much.

Resisting the nudge

The investors who navigate these moments well share a few habits. When someone tells them they are about to miss a great opportunity, that itself is the warning.

They are sceptical of urgency, especially when it is wrapped in someone else’s enthusiasm.

They check the source before they check the story. The messenger matters as much as the tip.

They ask themselves what the person passing it on would lose if the trade went wrong. A friend with no money in the trade is sharing an opinion. Someone with a position is asking for company.

Decisions like this are rarely rushed. They take their time. Being the one who missed a trade is preferable to buying one because everyone else did. Many have lost money this way before. That loss is doing more work than any rule.

The investors who navigate this best are willing to look beyond the people who told them.

The writer is director of private wealth management at UOB Kay Hian. The views expressed are his own and do not constitute investment advice.