Whom to follow - crowds vs. experts vs. friends: An exploratory study of decision making on crowdfunding websites

As a new form of fund raising method, crowdfunding has attained widespread popularity and attention in recent years. Crowdfunding aims at distributed audiences over the Internet so there are higher chances for new entrepreneurs and wide range of products to be funded. However, as the literature shows, investment activities in crowdfunding are mostly based on herding behavior. One potential explanation is the high level of project uncertainty as investors have very limited information on project initiators and their products. However, this herding behavior creates negative externalities as many fully funded projects fail to finish their promised products successfully. In this study, I argue that crowds provide mixed information and other reference groups such as friends and experts provide more specific information, which is more effective in decision making. Overall, based on rational choice theory and social comparison theory, I am investigating the decision making process of individuals in the crowdfunding context. More specifically, I examine whether funders follow crowds, friends or experts when they make investment decisions on crowdfunding websites and how their choice of reference group changes with different types and levels of project uncertainty and product complexity. The findings of the study is expected to contribute to the literature as I investigate the fit between the type of information that a reference group provides and the type of information needed by the decision maker, analyze the interrelation between seller and product uncertainty, and compare effects of different levels of project complexity on pledging behaviors. Based on the results, I argue that effective decision making in crowdfunding will be beneficial for the crowdfunding platform, project initiator, and the investor, and thus the findings would have significant practical implications as well.