Working Paper: NBER ID: w24281
Authors: Bing Han; David Hirshleifer; Johan Walden
Abstract: 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 over these characteristics. The model has strong predictions for how 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.
Keywords: social transmission bias; investor behavior; active investing; passive investing; social networks
JEL Codes: D03; D83; D85; D91; G02; G11; G12; G14; G4; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| realized returns (G19) | conversion rate to active strategies (G11) |
| conversion rate to active strategies (G11) | prevalence of active investment strategies (A) (G11) |
| realized returns (G19) | communication of returns among investors (G12) |
| social interactions (Z13) | adoption of strategies based on reports (L10) |
| social connectedness (Z13) | effects of social interactions (D91) |
| intensity of social interactions (C92) | degree of convexity in conversion rates (C29) |
| volatility and skewness in returns (C46) | adoption of active strategies (O36) |