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

57 Pages Posted: 8 Mar 2019 Last revised: 13 Nov 2019

Date Written: March 7, 2019

Abstract

Active investors often generate inferior returns. Social interactions might exacerbate this tendency, but the causal link between peer effects and active trading is 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 students assigned to groups where classmates have more trading background, are more likely to start trading after completing the program. These social effects are stronger when peers have experienced favorable outcomes. The paper documents a negative consequence from social interactions: students that registered for courses where peer returns are large, generate lower trading profits than other investors. The evidence is consistent with social learning under biased information -- people share their most successful experiences, encouraging stock trading among uninformed investors. The results shed light on the role of selective communication in the transmission and adoption of ideas, and more importantly, in the behavior of people expose to biased information. The findings show that social learning can lead to misguided decisions when peer choices are not accurately observed by members of the social network.

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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