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Social Transmission Bias and Investor Behavior

Part of:JFQA William F. Sharpe Best Paper Award Winner

Published online by Cambridge University Press:  28 January 2021

Bing HanOpen the ORCID record for Bing Han[Opens in a new window],
David Hirshleifer and
Johan Walden
Bing Han*
Affiliation:
University of Toronto Rotman School of Management
David Hirshleifer
Affiliation:
University of California at Irvine Merage School of Business david.h@uci.edu
Johan Walden
Affiliation:
University of California at Berkeley, University of Lausanne, and Swiss Finance Institute walden@haas.berkeley.edu
*
bing.han@Rotman.utoronto.ca (corresponding author)
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Abstract

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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 for these characteristics. The model has strong predictions for how the 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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 1 , February 2022, pp. 390 - 412
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

Bing Han holds the TMX Chair in Capital Markets at the University of Toronto. David Hirshleifer holds the Merage Chair in Business Growth at University of California at Irvine. Johan Walden holds the Mitsubishi Bank Chair in International Business and Finance at University of California at Berkeley. We thank Nick Barberis, Markus Brunnermeier, Terry Burnham, Jean-Paul Carvalho, Jennifer Conrad (the editor), David Dicks, Andrea Eisfeldt, Diego Garcia (the referee), Jakub Jurek, Blake LeBaron, JuanJuan Meng, Edward Rice, Nikolai Roussanov, Martin Schmalz, Siew Hong Teoh, Paul Tetlock, Rossen Valkanov, Michela Verardo, Ivo Welch, Jeff Wurgler, Hongjun Yan, Liyan Yang, Wei Xiong, and seminar participants at Cambridge University, Central University of Finance and Economics, Chinese University of Hong Kong, Columbia University, Emory University, the Federal Reserve Board of New York, Nanyang Business School, National New York University, Oxford University, Princeton University, Shanghai Advanced Institute of Finance, Singapore Management University, Southwestern University of Finance and Economics, University of California, Los Angeles (UCLA), University of California San Diego (UCSD), University of Hong Kong, University of North Carolina, University of Singapore, University of Toronto, University of Washington at Seattle, Washington University in St. Louis, Xiamen University, Yale University, and the Institute for Mathematical Behavioral Sciences at University of California Irvine; participants at the 2013 Brigham Young University (BYU) Red Rock Finance Conference, 2013 Stanford Institute for Theoretical Economics (SITE) Conference at Stanford University, 2016 Hong Kong University of Science and Technology (HKUST) Finance Symposium, and 2019 China International Forum on Finance and Policy for very helpful comments; and Jason Chan, SuJung Choi, and Major Coleman for helpful research assistance. A previous version of this article was entitled “Self-Enhancing Transmission Bias and Active Investing.” All remaining errors are our own.

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