Social Transmission Bias and Investor Behavior

Forthcoming Journal of Financial and Quantitative Analysis

42 Pages Posted: 22 Sep 2015 Last revised: 29 Jul 2020

See all articles by Bing Han

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Johan Walden

University of California, Berkeley - Finance Group

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

Han, Bing and Hirshleifer, David A. and Walden, Johan, Social Transmission Bias and Investor Behavior (July 27, 2020). Forthcoming Journal of Financial and Quantitative Analysis , 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)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

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