Thought and Behavior Contagion in Capital Markets

HANDBOOK OF FINANCIAL MARKETS: DYNAMICS AND EVOLUTION, 2009

78 Pages Posted: 16 Jun 2008 Last revised: 13 Dec 2008

See all articles by David A. Hirshleifer

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Siew Hong Teoh

University of California, Irvine - Accounting Area

Date Written: June 16, 2008

Abstract

Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affect others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the influence of an investor on others. In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others. We review here evidence concerning how these activities cause beliefs and behaviors to spread, affect financial decisions, and affect market prices; and theoretical models of social influence and its effects on capital markets. Social influence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets.

Keywords: capital markets, thought contagion, behavioral contagion, herd behavior, information cascades, social learning, investor psychology, accounting regulation, disclosure, behavioral finance, market efficiency, popular models, memes

JEL Classification: D83, D85, G10, G11, G12, G14, G3, M14, M41, Z13

Suggested Citation

Hirshleifer, David A. and Teoh, Siew Hong, Thought and Behavior Contagion in Capital Markets (June 16, 2008). HANDBOOK OF FINANCIAL MARKETS: DYNAMICS AND EVOLUTION, 2009. Available at SSRN: https://ssrn.com/abstract=1145884

David A. Hirshleifer (Contact Author)

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siew Hong Teoh

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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