Social Contagion and the Survival of Diverse Investment Styles
72 Pages Posted: 23 Feb 2022 Last revised: 27 Jul 2023
Date Written: September 7, 2021
We examine the contagion of investment ideas in a multiperiod setting in which investors are more likely to transmit their ideas to other investors after experiencing higher payoffs in one of two investment styles with different return distributions. We show that heterogeneous investment styles are able to coexist in the long run, implying a greater diversity than predicted by traditional theory. We characterize the survival and popularity of styles in relation to the distribution of security returns. In addition, we demonstrate that psychological effects such as conformist preference can lead to oscillations and bubbles in the choice of style. These results remain robust under a wide class of replication rules and endogenous returns. They offer empirically testable predictions, and provide new insights into the persistence of the wide range of investment strategies used by individual investors, hedge funds, and other professional portfolio managers.
Keywords: Contagion, Investment Styles, Investor Behavior, Investor Psychology, Adaptive Markets
JEL Classification: G40, G11, G12, G23
Suggested Citation: Suggested Citation