Social Transmission Bias and Active Investing

59 Pages Posted: 11 Jan 2017

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)

Date Written: August 1, 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 in uence, behavioral nance, sending schedule, receiving schedule, popular models, memes

JEL Classification: G11, G12

Suggested Citation

Han, Bing and Hirshleifer, David A., Social Transmission Bias and Active Investing (August 1, 2016). HKUST Finance Symposium 2016: Active Investing and Arbitrage Capital, Rotman School of Management Working Paper No. 2897801, Available at SSRN: or

Bing Han

University of Toronto, Rotman School of Management ( email )

Toronto, Ontario M5S 3E6
4169460732 (Phone)

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

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National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

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