Online Communities Peer-Reviewed Research

Risky Business

Participating in an online community can foster risky financial behavior.
  • Participation in an online community fosters risky financial behavior. In fact, the greater an individual’s participation, the greater their preference for risk.
  • Participation increases risk-taking when people perceive strong social ties with fellow members who will cushion the blow if something goes wrong.
  • Managers of firms that sponsor online communities should develop strategies that safeguard potentially vulnerable consumers and, in doing so, sustain their communities and brands.

The number of consumers who engage in transactions with one another in online communities continues to grow. Widespread participation in auctions, as well as a rise in crowdsourced lending, offers unprecedented opportunities for consumers to improve their financial position by participating in online communities. Yet, attempts to take advantage of such opportunities might come at a higher cost than consumers bargain for. Is it possible, for instance, that increased participation in online communities creates conditions that encourage individuals to take on more financial risk than is prudent?

Yes, according to findings from a recent article co-authored by Rice Business faculty member Utpal Dholakia, professor of management. In fact, the more someone participates in an online community, the more risky is her financial decision-making. Why? Because participants of online communities think that fellow community members will offer a helping hand if they find themselves in a bind.

It might seem foolish for anyone to have such strong faith in online community members. After all, an online community is not the same thing as a social networking site – think Facebook – where people tend to replicate an existing network of friendships online. In many online communities, relationships are initiated among individuals who are relative strangers, until the time that they meet up in the community. So, what would make someone think that an online community member, with whom she has no other connection, would have her back if she got into a financial jam?

The so-called “cushion hypothesis” suggests that online community members develop emotional connections and a sense of moral obligation toward one another. In fact, research shows that people who don’t know each other in real-space often meet up in virtual-space and then form a sort of kindred spirit. So, it’s not hard to see why some people might feel such strong social ties with community members that they expect those members to provide the same type of support that any other close friend might provide in a time of need.

Dholakia and his co-authors demonstrate the effect of online community participation on risky financial decisions through a series of field studies and lab experiments involving, the largest U.S. peer-to-peer online lending community, and an online community located on eBay’s German site ( In the first study, they randomly chose 600 of’s lenders and tracked their behavior for 18 months. They found that the riskiest loan portfolios were held by those who participated in the community and that the greater a lender’s participation – measured by the number of their postings – the greater the risk of the lender’s portfolio.

In a second study, the research team conducted a controlled experiment during which they observed the behavior of almost 14,000 eBay customers for an initial 16 month period. During this time, each customer had completed at least one eBay transaction successfully but had never joined and participated in an eBay community. After the 16 months, roughly half of the customers were randomly invited to participate in one of the eBay communities and the remaining customers were not invited. Both sets of customers were observed for another six months, and the findings were consistent with those from the study: The riskiest bidding behaviors (e.g. participating in bidding frenzies, winning bidding wars by spending the most) were enacted by those who participated in the community after accepting the invitation. Further, those who participated more, by posting a greater number of threads in the community, exhibited a greater level of risky behavior. In both the first and second study, the researchers were able to rule out the possibility that the results occurred simply because those who join online communities are more risk-seeking in general.

Finally, Dholakia and his co-authors conducted a laboratory experiment with 120 individuals to go the extra mile to explain why there is a link between online community participation and risky behavior. By manipulating individuals’ perceptions of the strength of social ties with community members, as well as by combing through individuals’ codified thoughts about their rationale for engaging in risky behaviors in the community, they found evidence to support the cushion hypothesis: When individuals felt that social ties were strong, they thought that fellow community members would have their back if something went wrong.

Consumers should be wary of their belief about the safe haven provided by relationships with online community members. Their belief might not reflect reality, and they could suffer real harm as a result. Findings from the study, for example, showed that increased risk-taking was not very rewarding. The return on investment for lenders was negatively correlated with the riskiness of their loan portfolios.

It seems clear that consumer participation in online communities is here to stay, so managers who sponsor such communities should develop strategies that minimize the potential harm for consumers. Why not alert consumers about their susceptibility to riskier decisions within the online community? In the long run, doing so would not only help consumers, but also help firms safeguard and sustain both their communities and their brands.

Utpal Dholakia is a marketing professor at Jones Graduate School of Business at Rice University.

To learn more, please see: Zhu, R. J., Dholakia, U. M., Chen, X. J., & Algesheimer, R. (2012). Does online community participation foster risky financial behavior? Journal of Marketing Research, 49(3), 394-407.