Social Transmission Bias and Investor Behavior
59 Pages Posted: 22 Sep 2015 Last revised: 13 Aug 2016
Date Written: August 2016
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: Suggested Citation