Self-Enhancing Transmission Bias and Active Investing
57 Pages Posted: 2 Apr 2012 Last revised: 5 Jun 2015
Date Written: May 2015
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: Suggested Citation