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

Abstract

Despite their popularity, crowdfunding platforms are experiencing negative headlines as fully funded projects continue to fail delivering the products on time. Current literature postulates that funders make decisions by following the decisions of the crowd, and this herd behavior leads to less than optimal decisions. One explanation of the negative externalities of such behavior is the misfit between the information provided by the crowd and the information needed by funders. Especially in patronage crowdfunding, funders are investors and buyers at the same time. This duality coupled with the lack of supervision of projects creates unique challenges. In addition to opportunism uncertainty, funders face competence uncertainty. This study provides evidence that social information gathered from reference groups decrease these uncertainties. Further investigation showed that different reference groups provide different types of social information and product complexity plays a role in the uncertainties experienced and the importance given to different reference groups.