Working Paper: NBER ID: w27745
Authors: Erol Akcay; David Hirshleifer
Abstract: The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population, and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment.
Keywords: social finance; cultural evolution; transmission bias; market dynamics
JEL Codes: D03; D15; D21; D25; D53; D8; D82; D83; D84; D85; D9; D91; D92; G02; G1; G11; G12; G14; G28; G3; G31; G32; G34; G35; G4; G41; G5; G51; G53; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cultural traits (Z13) | financial market outcomes (G19) |
| social transmission processes (Z13) | cultural traits (Z13) |
| social interactions (Z13) | financial traits (G51) |
| cultural evolution (Z10) | financial traits (G51) |
| financial traits (G51) | market outcomes (P42) |
| social transmission biases (C92) | cultural traits (Z13) |
| visibility and payoff-biased transmission (G41) | cultural traits (Z13) |
| cultural evolution (Z10) | market dynamics (D49) |
| financial traits (G51) | project choices (O22) |
| financial traits (G51) | trading profits (F19) |
| cultural evolution (Z10) | emergence of bubbles (E32) |
| cultural evolution (Z10) | predictability of stock returns (G17) |