Thought and Behavior Contagion in Capital Markets

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