NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Social Transmission Bias and Investor Behavior

Bing Han, David Hirshleifer, Johan Walden

NBER Working Paper No. 24281
Issued in February 2018, Revised in June 2019
NBER Program(s):Asset Pricing Program

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.

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Document Object Identifier (DOI): 10.3386/w24281

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