Research Note—The Allure of Homophily in Social Media: Evidence from Investor Responses on Virtual Communities

Millions of people participate in online social media to exchange and share information. Presumably, such information exchange could improve decision making and provide instrumental benefits to the participants. However, to benefit from the information access provided by online social media, the participant will have to overcome the allure of homophily—which refers to the propensity to seek interactions with others of similar status (e.g., religion, education, income, occupation) or values (e.g., attitudes, beliefs, and aspirations). This research assesses the extent to which social media participants exhibit homophily (versus heterophily) in a unique context—virtual investment communities (VICs). We study the propensity of investors in seeking interactions with others with similar sentiments in VICs and identify theoretically important and meaningful conditions under which homophily is attenuated. To address this question, we used a discrete choice model to analyze 682,781 messages on Yahoo! Finance message boards for 29 Dow Jones stocks and assess how investors select a particular thread to respond. Our results revealed that, despite the benefits from heterophily, investors are not immune to the allure of homophily in interactions in VICs. The tendency to exhibit homophily is attenuated by an investor’s experience in VICs, the amount of information in the thread, but amplified by stock volatility. The paper discusses important implications for practice.