Social Transmission Bias and Investor Behavior
Bing Han, David Hirshleifer, and Johan Walden
Individual investors often invest actively and lose thereby. Social interaction seems to exacerbate this tendency. In our model, senders’ propensity to discuss their strategies’ returns, and receivers’ propensity to be converted, are increasing in sender return. A distinctive implication is that the rate of conversion of investors to active investing is convex in sender return. Unconditionally, active strategies (high variance, skewness, and personal involvement) dominate the population unless the return penalty to active investing is too large. Thus, the model can explain overvaluation of `active’ asset characteristics even when investors have no inherent preference over them. It also has strong predictions for how adoption of active strategies depends on features of the investor social network. In contrast with nonsocial approaches, sociability and other features of the sending and receiving processes are determinants of the popularity of active investing and the pricing of active strategies.