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Social Transmission Bias and Investor Behavior

65 Pages Posted: 16 Oct 2017  

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

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Date Written: October 15, 2017

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. It also has strong predictions for how adoption of active strategies depends on features of the investor social network. 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, 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 (October 15, 2017). 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 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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