Social 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
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