Is Talk Cheap Online:
Strategic Interaction in A Stock Trading Chat Room
Jie Lu
and
Bruce Mizrach∗
Department of Economics
Rutgers University
Revised: February 1, 2008
Abstract:
We consider a model of an internet chat room with free entry but secure identity. Traders
exchange messages in real time of both a fundamental and non-fundamental nature. We explore
conditions under which traders post truthful information and make trading decisions. We also
describe an equilibrium in which momentum and hybrid traders profit from their exposure to
informed traders in the chat room. The model generates a number of empirical predictions:(1)
traders with middle skill level communicate most often; (2) All but the most informed traders
learn from public information about prices, and they optimally follow informed traders; (3) Traders
follow informed traders more often. We test and affirm all three predictions using a unique data
set of chat room logs from the Activetrader Financial Chat Room.
Keywords: chat room; strategic information; individual traders; behavioral finance;
JEL Codes: G14;
∗ Corresponding author: Bruce Mizrach, Department of Economics, Rutgers University, New Brunswick,
NJ 08901, mizrach@econ.rutgers.edu. We would like to thank Susan Weerts for research assistance and
Colin Campbell for helpful discussions. We have also benefited from comments made at the American
Economic Association meetings in Chicago and the Society for Computational Economics in Montreal.
1. Introduction
Wall Street has a lot in common with Madison Avenue. There is a great deal of information
disseminated to influence portfolio selection. There are numerous communications among profes-
sionals and here comes out the questions: will trader A take positions in a stock after trader B says
he has loaded up? When will trader B tell the truth and when will he lie? There is no effective
way to study the real time effects of such informal communications among professional investors.
However, we now can study similar interactions among individual