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The Use of Social Information for Reducing Crowdfunding Uncertainty

There is an interesting phenomenon in crowdfunding – while some campaigns tremendously fail, other succeed in getting the interest of the crowds as a snowball.

To help us better understand the reasons for the occurrence of this phenomenon, of a great use comes a study, conducted by scientists at Binghamton University in New York, which reveals that social information, collected from friends and experts, can provide potential promoters with a more effective approach to the campaign.

On crowdfunding platforms like Arikovani, innovative projects, usually launched by young entrepreneurs, are brought together with the collective efforts and power of the community. But one of the biggest concerns, which the backers have towards the campaign, usually comes from the questioning of the experience and capabilities of the entrepreneurs.

Unlike traditional e-commerce platforms, where products are complete and ready for shipment, products that are published on crowdfunding platforms have a long way to go before to be ready to hit the market. The process of taking an idea, turning it to a successful product and actually succeeding in getting this product in the hands of the end user, requires a lot of work and dedication. But it is very common the supporters to have doubts about the ability and readiness of the team to make it all happen smoothly.

One of the biggest concerns comes from the fact that more and more backers tend to have a raising level of concerns as they are exposed to more and more information about the projects. Through social media channels, the potential supporters are able to see updates when someone of their friends or people they follow supports certain campaign, making it more tempting to get involved and make a donation themselves. There is an explanation for this behavior, widely discussed in Herd Psychology studies.

But in this scenario, it is easy to believe that the decisions, made by the supporters, are not well thought out. According to researchers, crowdfunding platforms that develop mechanisms, which influence the decision-making processes of the potential backers, can be more successful in the long run. Suggestions are to exceed the trust of supporters through friends and experts.

Surinder Singh Kahai, associate professor in Binghamton University’s School of Management, said on the subject the following: “The crowdfunding website can extract information from Facebook, and then your Facebook friends will be notified that you have funded a project.” Then he adds that “Information can also be extracted from sources such as LinkedIn. That way, if you are an engineer funding a computer- or hardware-related project, the crowdfunding platform can give you expertise level.”

Kahai and Ali Alper Yayla, who are researchers at Binghamton University, along with their colleague Yu Lei from SUNY College at Old Westbury worked closely together to examine the influence of the opinion of friends, family, experts and the crowd in general over the crowdfunding support decision-making processes.

The scientists worked closely with Amazon Mechanical Turk, a crowdsourcing marketplace, to design web pages that replicated the crowdfunding experience and placed comments on different reference groups, which allowed them to examine the behavior of the backers to determine in which scenario the sponsors were more influenced by which reference groups.

According to the research results, the supporters in relatively uncomplicated products prefer to follow the opinion of the community and to comply with their friends. On the other hand, in complex products, people want to get their hands on direct information from experts before they decide to make a donation.

To summarize the results, Yayla says: “We have to look at external sources, specifically reference groups, which include our friends and family, or experts who have expertise in a certain area and the general population.” And then continued: “When I have to make a decision about which mechanic to bring my car to, I should probably listen to the experts, but instead I listen to my friends or I use a website such as Yelp to read reviews.”

You are able to find more details about the research conducted by Lei Yu, Ali Alper Yayla and Surinder Kahai at the following link:

Guiding the Herd: The Effect of Reference Groups in Crowdfunding Decision Making

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