Facebook (NASDAQ:FB) stock suffered a large number of negative headlines this weekend after the company revealed that it had altered the news feeds of more than a half a million users to see how positive or negative posts may impact users' emotions. Despite the pessimistic headlines, investors in the stock seem undeterred. The stock is trading slightly higher today on top of a 3.5% gain in the past five days.
"To Facebook, we are all lab rats," said The New York Times' Vindu Goel in the opening line of her piece covering the story this weekend.
The company conducted a psychological test on 689,003 Facebook users for a week in early 2012, Facebook revealed last week. Users were exposed to either highly positive or negative material to see how friends' posts would impact the tone of their own posts.
Indeed, there was a correlation between negative and positive posts from friends. Moods were contagious.
The study was revealed in an academic paper Facebook published in conjunction with two university researchers.
Lawful, sure. But is it ethical?
After the study was made public, there was considerable anger expressed toward Facebook's little experiment. While the company's research was technically legal, thanks to consent as a condition in the network's terms of service, it undoubtedly "smells" unethical.
Critics have described Facebook's experiment as "creepy," "super disturbing," and evil," according to Bidness Etc author George Zack.
While the Facebook employee involved in the study, Adam Kramer, did apologize on his Facebook feed yesterday, he also offered some defense.
The reason we did this research is because we care about the emotional impact of Facebook and the people that use our product. We felt that it was important to investigate the common worry that seeing friends post positive content leads to people feeling negative or left out. At the same time, we were concerned that exposure to friends' negativity might lead people to avoid visiting Facebook.
Further, he explained that the impact on negativity was minimal.
And at the end of the day, the actual impact on people in the experiment was the minimal amount to statistically detect it -- the result was that people produced an average of one fewer emotional word, per thousand words, over the following week.
Even considering Facebook's defense, it's difficult to argue with the critics. The news that Facebook would manipulate a feed to analyze psychological effects is quite disturbing. Sure, the company was trying to improve the experience with the data, but news feed manipulation in a psychological study is certainly borderline unethical.
That said, the reaction in the stock market tells its own story, with the stock trading slightly higher at the time of this writing. Investor confidence in Facebook's network effect is enormous. The market seems to be saying, "Unethical research? That's unfortunate -- but Facebook will learn its lesson, and users will stick around."
Indeed, Facebook's network effect is undoubtedly the company's strongest competitive advantage. Given the scale of the current user base -- particularly Facebook's 802 million daily active users -- no other social network can even come close to offering the same robust level of connectivity; leaving the network would mean leaving behind the posts of many friends and family.
Facebook's business will likely be unaffected by this experiment. But shareholders of the social network should hope this is the last time the company conducts a psychological study by manipulating users' feeds.