Social Transmission Bias and Investor Behavior

59 Pages Posted: 22 Sep 2015 Last revised: 13 Aug 2016

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: August 2016

Abstract

Individual investors often invest actively and lose thereby. Social interaction seems to exacerbate this tendency. In our model, senders' propensity to discuss their strategies' returns, and receivers' propensity to be converted, are increasing in sender return. A distinctive implication is that 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 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. In contrast with nonsocial approaches, sociability and other features of the sending and receiving processes are determinants of the popularity of active investing and the pricing of active strategies.

Keywords: capital markets, active investing, thought contagion, transmission bias, behavioral contagion, social influence, behavioral finance, sending schedule, receiving schedule, popular models, memes

JEL Classification: G10, G11, G12, G14

Suggested Citation

Han, Bing and Hirshleifer, David A., Social Transmission Bias and Investor Behavior (August 2016). Available at SSRN: https://ssrn.com/abstract=2663860 or http://dx.doi.org/10.2139/ssrn.2663860

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

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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