Research shows downfall of amateur investors backing equity crowdfunded ventures
While believing in yourself can often be great advice it can be a downfall for investors according to a new study.
Researchers at Indiana University’s Kelley School of Business studied the choices made by amateur investors investing online in unregulated, sometimes risky, equity crowdfunded ventures.
The study authors note that 1 in 5 deals of this type result in no returns for investors with some losing large sums.
They found that those investors with an overinflated view of their investing abilities were three times more likely to make poor decisions when investing in these ventures.
"Our research shows that crowdfunders with inflated self-belief quickly stop processing information properly, put in less decision-making effort, erroneously follow the crowd and make hasty investment decisions in poor-quality investment opportunities," said Regan Stevenson, assistant professor of management and entrepreneurship at Kelley.
The authors say that investing in equities always carries risk but that these investments have been increasing in popularity and do not offer the regulatory protections offered through traditional investment platforms.
Regulation for crowdfunding
Stevenson and his co-authors - Michael Ciuchta of the University of Massachusetts, Chaim Letwin and Jenni Dinger of the Suffolk University and Jeffrey Vancouver of Ohio University – believe that while crowdfunding is generally positive, there are improvements needed in training, regulation, and legislation.
"Given that the market for equity crowdfunding is growing rapidly -- and may someday soon disrupt traditional private equity models -- it is imperative that educators, regulators and legislators think about ways to ameliorate the potential risks for amateur crowdfunders engaged in the high-risk world of startup investing," added Stevenson.
He said that he is encouraged by the formation of ratings companies for these investments.
The paper, "Out of Control or Right on the Money? Funder Self-Efficacy and Crowd Bias in Equity Crowdfunding," will be published in the March issue of the Journal of Business Venturing.
