Social Transmission Bias and Investor Behavior

Han, Bing; Hirshleifer, David; Waldén, Johan

doi:10.2139/ssrn.3053655

Cited by 9 publications

(14 citation statements)

References 131 publications

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“…In financial markets, people make decisions not only by observing what others do, but also by talking to other people about their investments. Han et al (2018) build a model of such investor-to-investor communication. There are N investors, each of whom follows one of two investment strategies.…”

Section: Herding and Social Interactionmentioning

confidence: 99%

Psychology-Based Models of Asset Prices and Trading Volume

Barberis

2018

Handbook of Behavioral Economics: Applications and Foundations 1

121

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Section: Herding and Social Interactionmentioning

confidence: 99%

Psychology-Based Models of Asset Prices and Trading Volume

Barberis

2018

Handbook of Behavioral Economics: Applications and Foundations 1

121

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“…We model selective communication by assuming that the revealed peer signal is a nonlinear function of the true peer outcome, ̃ max 0,̃ . We assume that signal receivers do not internalize the bias in communication similar to Han et al (2018), but we also relax this assumption by solving for a model where potential investors understand that only positive peer outcomes are shared (see Appendix A). The testable implications of both models are similar, so we focus here on the case with naïve signal receivers.…”

Section: Selective Communicationmentioning

confidence: 99%

“…Although people often avoid lying given their preference for being seen as honest(Abeler, et al, 2019), they might selectively omit information that is unfavorable, or that may give the impression that they are not successful Bénabou & Tirole (2002). present a general economic model in which agents protect their self-esteem by engaging in self-deception through selective memory awareness.4 The notable exception isHan et al (2018). The authors introduce a model of social interactions in which investors are more likely to discuss profitable investments to examine active versus passive investments.…”

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confidence: 99%

Active Trading and (Poor) Performance: The Social Transmission Channel

Pradilla¹,

Morales²

2019

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Active investors often generate inferior returns. Social interactions might exacerbate this tendency, but the causal link between peer effects and active trading is difficult to identify empirically. This paper exploits the exogenous assignment of students to classrooms in a large-scale financial education initiative to evaluate the transmission of trading strategies among individual investors. The paper shows that students assigned to groups where classmates have more trading background, are more likely to start trading after completing the program. These social effects are stronger when peers have experienced favorable outcomes. The paper documents a negative consequence from social interactions: students that registered for courses where peer returns are large, generate lower trading profits than other investors. The evidence is consistent with social learning under biased informationpeople share their most successful experiences, encouraging stock trading among uninformed investors. The results shed light on the role of selective communication in the transmission and adoption of ideas, and more importantly, in the behavior of people expose to biased information. The findings show that social learning can lead to misguided decisions when peer choices are not accurately observed by members of the social network.3 information available to those that are forming an opinion about the value of an activity. Our paper attempts to study how investment choices are affected by biases in information transmission.Our analysis relies on a natural experiment involving exogenously assigned peer groups.Starting in 2008, the Colombian Stock Exchange (CSE) launched a series of professional courses on financial topics; 5 the majority focused on equity strategies (the program is discussed in detail in Section 3). Registered individuals were assigned to small sections that spent the duration of each course studying about stock trading in a classroom setting -on average 16 students per class. We combine class records with administrative microdata of stock transactions to distinguish between students with trading experience and those with no trading background. In other words, we observe the trades of students that where active in the stock market before they participate in one of the CSE financial courses. We also observe trades and performance of students that began trading only after completing a course, that is, after interacting with some experienced classmates in their artificially-formed group. Overall, our novel data set combines the official class records and trading activity of 13,730 students from over 1,100 courses between 2008 to 2016.While we accurately observe the stock trades of experienced students, we do not know the specific information shared among classmates. To address this issue, we formalize the role of selective communication by introducing information-transmission-bias in a model of social learning. In the model, potential investors with different trading skills are uncertain about the expected payoffs from...

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“…If listeners neglect this selection bias in what is reported (there is much general psychological evidence of such neglect), they may conclude that ordinary people can easily profit by actively trading individual stocks. This argument is modelled formally in a working paper by Han et al (2018).…”

Section: David Hirshleifer and Siew Hong Teohmentioning

confidence: 99%

Folk-economic beliefs as “evidential fiction”: Putting the economic public discourse back on track

Acerbi

Sacco

2018

Behav Brain Sci

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Folk-economic beliefs may be regarded as “evidential fictions” that exploit the natural tendency of human cognition to organize itself in narrative form. Narrative counter-arguments are likely more effective than logical debunking. The challenge is to convey sound economic reasoning in narratively conspicuous forms – an opportunity for economics to rethink its role and agency in public discourse, in the spirit of its old classics.

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Social Transmission Bias and Investor Behavior

Cited by 9 publications

References 131 publications

Psychology-Based Models of Asset Prices and Trading Volume

Psychology-Based Models of Asset Prices and Trading Volume

Active Trading and (Poor) Performance: The Social Transmission Channel

Folk-economic beliefs as “evidential fiction”: Putting the economic public discourse back on track

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