Download This PaperSocial Transmission Bias and Investor Behavior
Forthcoming Journal of Financial and Quantitative Analysis
42 Pages Posted: 22 Sep 2015 Last revised: 29 Jul 2020
Date Written: July 27, 2020
Abstract
We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active strategies (e.g., high variance and skewness) dominate, although investors have no inherent preference over these characteristics. The model has strong predictions for how adoption of active strategies depends on investors' social networks. In contrast with nonsocial approaches, sociability, self-enhancing transmission and other features of the communication process determine the popularity and pricing of active investment strategies.
Keywords: social interaction, transmission bias, active investing, networks, thought contagion, behavioral finance
JEL Classification: G10, G11, G12, G14
Suggested Citation: Suggested Citation
Bing Han
University of Toronto, Rotman School of Management ( email )
Toronto, Ontario M5S 3E6
Canada
4169460732 (Phone)
David Hirshleifer (Contact Author)
University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )
Marshall School of Business
Los Angeles, CA 90089
United States
HOME PAGE: http://https://sites.uci.edu/dhirshle/
Johan Walden
University of California, Berkeley - Finance Group ( email )
545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)