Thought and Behavior Contagion in Capital Markets
David Hirshleifer and Siew Hong Teoh
Ch. 1 of Handbook of Financial Markets: Dynamics and Evolution, 2009
Prevailing models of capital markets capture a limited form of social inﬂuence and information transmission, in which the beliefs and behavior of an investor aﬀect others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the inﬂuence of an investor on others. In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others. We review here evidence concerning how these activities cause beliefs and behaviors to spread, aﬀect ﬁnancial decisions, and aﬀect market prices; and theoretical models of social inﬂuence and its eﬀects on capital markets. Social inﬂuence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets.