The use of Internet-based social media tools will accelerate the onset of recession, a new report from analyst group Forrester suggests. Web 2.0 technologies make markets – especially the financial services industry – more susceptible to the herd mentality and rash judgements on the part of consumers.

The reasons for this are threefold. Firstly, in the age of user-generated content, people tend to rely on the opinions of their peers over the advice of experts. For example, a Forrester benchmark study found that consumers seeking financial products are more likely to trust customer testimonies than the opinion of journalists and experts. This effect means that ‘conventional wisdom’ is more likely to prevail, whether it is right or wrong.

Secondly, news spreads quickly on the Internet – especially bad news. This can lead to snap judgements and short-term decision making. The report’s author points to the recent collapse of Icelandic investment fund icesave: when customers noticed that the fund’s website was down, news spread within hours, creating a stampede to withdraw investments.

Thirdly, customers can also take action faster today than ever before. Online banking services, for example, allow consumers to withdraw funds from their bank at a moment’s notice.

“The ‘public’ emotion surrounding an event can quickly spread and influence individuals’ private behaviour,” explains report author Reineke Reitser. “This will hurt some financial institutions more than others – particularly if they have more self-directed consumers in their client base.”

The report recommends that business take stock of how popular Web 2.0 and online services are among their customer base.

Further reading

Web 2.0 in business
Ten outstanding examples of business social media projects harnessing the power of community and collaboration

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