Peer Pressure: Social Interaction and the Disposition Effect
Review of Financial Studies, 29(11): 3177-3209.
74 Pages Posted: 2 Nov 2014 Last revised: 23 Nov 2020
Date Written: April 27, 2016
Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web-platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.
Keywords: Individual Investors, Disposition Effect, Behavioral Biases, Social Networks, Causal Peer Effects
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