Self-Enhancing Transmission Bias and Active Investing

57 Pages Posted: 2 Apr 2012 Last revised: 5 Jun 2015

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business

Date Written: May 2015

Abstract

Individual investors often invest actively and lose thereby. Social interaction seems to exacerbate this tendency. In the model here, senders' propensity to discuss their strategies' returns, and receivers' propensity to be converted, are increasing in sender return. The rate of conversion of investors to active investing is convex in sender return. Unconditionally, active strategies (high variance, skewness, and personal involvement) dominate the population unless the mean return penalty to active investing is too large. Thus, the model can explain overvaluation of 'active' asset characteristics even when investors have no inherent preference over them.

Keywords: social interactions, self-enhancement, active investing, behavioral finance, behavioral economics, social networks, cultural evolution

JEL Classification: G11, G12

Suggested Citation

Han, Bing and Hirshleifer, David A., Self-Enhancing Transmission Bias and Active Investing (May 2015). Available at SSRN: https://ssrn.com/abstract=2032697 or http://dx.doi.org/10.2139/ssrn.2032697

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)

David A. Hirshleifer (Contact Author)

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

Irvine, CA California 92697-3125
United States

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