Active Trading and (Poor) Performance: The Social Transmission Channel

34 Pages Posted: 8 Mar 2019 Last revised: 9 Mar 2019

Date Written: March 7, 2019

Abstract

Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that favorable peer returns on single-stock transactions stimulate market entry among inexperienced investors, even when total portfolio performance among peers is negative. The results are consistent with selective communication: individuals with trading background share their most favorable trades, which attracts others to the stock market. Inexperienced individuals who are exposed to peers with large returns on single trades appear to overestimate the value of active trading. The paper finds that these rookie investors make more stock transactions, trade more speculatively, but also generate inferior returns. The findings show the strength of social communication as a key determinant of financial decision making.

Keywords: International Trade and Trade Rules, Educational Sciences, Gender and Development, Financial Literacy, Educational Institutions & Facilities, Effective Schools and Teachers

Suggested Citation

Escobar Pradilla, Laura Manuela and Morales, Alvaro, Active Trading and (Poor) Performance: The Social Transmission Channel (March 7, 2019). World Bank Policy Research Working Paper No. 8767. Available at SSRN: https://ssrn.com/abstract=3348770

Laura Manuela Escobar Pradilla (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Alvaro Morales

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

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