Social Transmission Bias and Investor Behavior

65 Pages Posted: 16 Oct 2017 Last revised: 19 Jun 2018

Bing Han

University of Toronto, Rotman School of Management

David A. Hirshleifer

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

Johan Walden

University of California, Berkeley - Finance Group

Multiple version iconThere are 2 versions of this paper

Date Written: January 17, 2018

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: capital markets, behavioral finance, active investing, social networks, thought contagion, transmission bias

JEL Classification: G11, G12

Suggested Citation

Han, Bing and Hirshleifer, David A. and Walden, Johan, Social Transmission Bias and Investor Behavior (January 17, 2018). Rotman School of Management Working Paper No. 3053655. Available at SSRN: https://ssrn.com/abstract=3053655 or http://dx.doi.org/10.2139/ssrn.3053655

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

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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