Feedback and the Success of Irrational Investors

Hirshleifer, David; Subrahmanyam, Avanidhar; Titman, Sheridan

doi:10.2139/ssrn.422181

Cited by 26 publications

(18 citation statements)

References 42 publications

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“…This evidence is consistent with models that propose a positive effect of bubbles on the asset's fundamental value, such as Jerzmanowski and Nabar (2008) and Hirshleifer et al (2006). Since bubbles lead to increases in fundamental value, subsequent crashes will not wipe out all gains.…”

Section: Introductionsupporting

confidence: 87%

“…Although rather different factors play a role in the model of Hirshleifer et al (2006) and Jerzmanowski and Nabar (2008), they both arrive at the conclusion that bubbles can have a positive effect on the real economy. This proposition can provide an explanation of our finding that the weight allocated to the bubbly asset is positive, even in the long run.…”

Section: Investment Horizon and Optimal Portfolio Weightmentioning

confidence: 97%

“…While the models discussed so far all focus on rational investors, the model of Hirshleifer et al (2006) proposes that irrational investors can benefit from bubbles. The crucial difference between their work and the previous studies is that they introduce a feedback loop from prices to cashflows.…”

Section: Theoretical Literaturementioning

confidence: 99%

“…If the investor has long horizon and can be reasonable certain that the bubble will crash before he has to close his position, going short seems to be the optimal strategy given that bubbles are zero-sum games. If, following the idea of Hirshleifer et al (2006), bubbles are related to increases in fundamental value, this conclusion might not be valid and holding a long position might even be a good long-run strategy.…”

Section: Empirical Literaturementioning

confidence: 99%

“…Jerzmanowski and Nabar (2008) provide evidence that the NASDAQ bubble had a positive effect on aggregate net wealth. Hirshleifer et al (2006) present a model that includes a feedback effect from the firm's stock price to its cash-flows. In this setting, even irrational investors can earn positive abnormal returns.…”

Section: Introductionmentioning

confidence: 99%

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Bubbles and Investment Horizons

Guenster

Kole

2009

SSRN Journal

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The current theoretical literature makes contradicting predictions regarding the impact of an investor's horizon on his optimal trading strategy in the presence of bubbles. We analyze this relation empirically using a Regime Switching Model to identify bubbles and crashes. We base our analysis on industry returns and find high positive returns after bubbles at the one-month horizon. At intermediate horizons of 2-4 months our findings are mixed, but thereafter, for horizons up to five years, returns following a bubble are again more positive than returns in the absence of a bubble. We compare a mean-variance as well as a downside-risk averse investor's portfolio allocation in the presence and absence of a bubble. The weight allocated to the bubbly asset is higher for horizons up to 5 years. These findings suggest that even for a rather unsophisticated trader who does not follow daily market news, riding bubbles is a more profitable strategy than refraining from investing in the bubbly asset. Given the broad range of horizons during which riding bubbles is the optimal strategy, our results question the idea that bubbles are zero-sum games.

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Section: Introductionsupporting

confidence: 87%

Section: Investment Horizon and Optimal Portfolio Weightmentioning

confidence: 97%

Section: Theoretical Literaturementioning

confidence: 99%

Section: Empirical Literaturementioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Bubbles and Investment Horizons

Guenster

Kole

2009

SSRN Journal

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Analyzing stock market trends using social media user moods and social influence

Wang

Madden

et al. 2019

Asso for Info Science & Tech

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Information from microblogs is gaining increasing attention from researchers interested in analyzing fluctuations in stock markets. Behavioral financial theory draws on social psychology to explain some of the irrational behaviors associated with financial decisions to help explain some of the fluctuations. In this study we argue that social media users who demonstrate an interest in finance can offer insights into ways in which irrational behaviors may affect a stock market. To test this, we analyzed all the data collected over a 3‐month period in 2011 from Tencent Weibo (one of the largest microblogging websites in China). We designed a social influence (SI)‐based Tencent finance‐related moods model to simulate investors' irrational behaviors, and designed a Tencent Moods‐based Stock Trend Analysis (TM_STA) model to detect correlations between Tencent moods and the Hushen‐300 index (one of the most important financial indexes in China). Experimental results show that the proposed method can help explain the data fluctuation. The findings support the existing behavioral financial theory, and can help to understand short‐term rises and falls in a stock market. We use behavioral financial theory to further explain our findings, and to propose a trading model to verify the proposed model.

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Returns to sentiment investors in IPOs

Leite

2005

Economics Letters

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Feedback and the Success of Irrational Investors

Cited by 26 publications

References 42 publications

Bubbles and Investment Horizons

Bubbles and Investment Horizons

Analyzing stock market trends using social media user moods and social influence

Returns to sentiment investors in IPOs

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