Social interaction and stock-market participation
| Authors | Hong, Kubik, Stein |
| Journal | Journal of Finance |
| Year | 2005 |
| Type | Published Paper |
| Abstract | We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households-those who interact with their neighbors, or attend church-are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher. |
| URL | https://doi.org/10.1111/j.1540-6261.2004.00629.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Thy neighbor's portfolio: Word-of-mouth effects in the holdings and trades of money managers
| Authors | Hong, Kubik, Stein |
| Journal | Journal of Finance |
| Year | 2005 |
| Type | Published Paper |
| Abstract | A mutual fund manager is more likely to buy (or sell) a particular stock in any quarter if other managers in the same city are buying (or selling) that same stock. This pattern shows up even when the fund manager and the stock in question are located far apart, so it is distinct from anything having to do with local preference. The evidence can be interpreted in terms of an epidemic model in which investors spread information about stocks to one another by word of mouth. |
| Keywords | Word-of-mouth effects, fund managers, trading behaviors |
| URL | https://doi.org/10.1111/j.1540-6261.2005.00817.x |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior |
The role of social capital in financial development
| Authors | Guiso, Sapienza, Zingales |
| Journal | American Economic Review |
| Year | 2004 |
| Type | Published Paper |
| Abstract | To identify the effect of social capital on financial development, we exploit social capital differences within Italy. In high-social-capital areas, households are more likely to use checks, invest less in cash and more in stock, have higher access to institutional credit, and make less use of informal credit. The effect of social capital is stronger where legal enforcement is weaker and among less educated people. These results are not driven by omitted environmental variables, since we show that the behavior of movers is still affected by the level of social capital of the province where they were born. |
| Keywords | Household finance, social capital, financial development, education, legal environment |
| URL | https://www.aeaweb.org/articles?id=10.1257/0002828041464498 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Theory |
Social interaction and stock-market participation
| Authors | Hong, Kubic, Stein |
| Journal | The Journal of Finance |
| Year | 2004 |
| Type | Published Paper |
| Abstract | We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households - those who interact with their neighbors, or attend church - are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher. |
| Keywords | Social interaction, household investment decisions, word-of-mouth effect, enjoyment-from-talking-about-the-market, peer effects |
| URL | https://doi.org/10.1111/j.1540-6261.2004.00629.x |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Persuasion bias, social influence, and unidimensional opinions
| Authors | DeMarzo, Vayanos, Zwiebel |
| Journal | Quarterly Journal of Economics |
| Year | 2003 |
| Type | Published Paper |
| Abstract | We propose a boundedly rational model of opinion formation in which individuals are subject to persuasion bias; that is, they fail to account for possible repetition in the information they receive. We show that persuasion bias implies the phenomenon of social influence, whereby one's influence on group opinions depends not only on accuracy, but also on how well-connected one is in the social network that determines communication. Persuasion bias also implies the phenomenon of unidimensional opinions; that is, individuals' opinions over a multidimensional set of issues converge to a single "left-right" spectrum. We explore the implications of our model in several natural settings, including political science and marketing, and we obtain a number of novel empirical implications. |
| URL | https://doi.org/10.1162/00335530360698469 |
| Tags | Social Network Structure | Social Transmission Biases | Theory |
The role of information and social interactions in retirement plan decisions: Evidence from a randomized experiment
| Authors | Duflo, Saez |
| Journal | Quarterly Journal of Economics |
| Year | 2003 |
| Type | Published Paper |
| Abstract | This paper analyzes a randomized experiment to shed light on the role of information and social interactions in employees' decisions to enroll in a Tax Deferred Account (TDA) retirement plan within a large university. The experiment encouraged a random sample of employees in a subset of departments to attend a benefits information fair organized by the university, by promising a monetary reward for attendance. The experiment multiplied by more than five the attendance rate of these treated individuals (relative to controls), and tripled that of untreated individuals within departments where some individuals were treated. TDA enrollment five and eleven months after the fair was significantly higher in departments where some individuals were treated than in departments where nobody was treated. However, the effect on TDA enrollment is almost as large for individuals in treated departments who did not receive the encouragement as for those who did. We provide three interpretations-differential treatment effects, social network effects, and motivational reward effects-to account for these results. |
| URL | https://academic.oup.com/qje/article-abstract/118/3/815/1943005 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Participation and investment decisions in a retirement plan: The influence of colleagues' choices
| Authors | Duflo, Saez |
| Journal | Journal of Public Economics |
| Year | 2002 |
| Type | Published Paper |
| Abstract | This paper investigates whether peer effects play an important role in retirement savings decisions. We use individual data from employees of a large university to study whether individual decisions to enroll in a Tax Deferred Account plan sponsored by the university, and the choice of the mutual fund vendor for people who choose to enroll, are affected by the decisions of other employees in the same department. To overcome the identification problems, we divide the departments into sub-groups (along gender, status, age, and tenure lines) and we instrument the average participation of each peer group by the salary or tenure structure in this group. Our results suggest that peer effects may be an important determinant of savings decisions. |
| Keywords | Peer effects, retirement saving plans |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0047272701000986 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Bad is stronger than good
| Authors | Baumeister, Bratslavsky, Finkenauer, Vohs |
| Journal | Review of General Psychology |
| Year | 2001 |
| Type | Published Paper | Literature Review Paper |
| Abstract | The greater power of bad events over good ones is found in everyday events, major life events (e.g., trauma), close relationship outcomes, social network patterns, interpersonal interactions, and learning processes. Bad emotions, bad parents, and bad feedback have more impact than good ones, and bad information is processed more thoroughly than good. The self is more motivated to avoid bad self-definitions than to pursue good ones. Bad impressions and bad stereotypes are quicker to form and more resistant to disconfirmation than good ones. Various explanations such as diagnosticity and salience help explain some findings, but the greater power of bad events is still found when such variables are controlled. Hardly any exceptions (indicating greater power of good) can be found. Taken together, these findings suggest that bad is stronger than good, as a general principle across a broad range of psychological phenomena. |
| Keywords | Health economicsm, COVID-19, vaccines, lottery incentives, public policy |
| URL | https://doi.org/10.1037/1089-2680.5.4.323 |
| Tags | Experimental / Survey-Based Empirical | Social Transmission Biases |
Negativity bias, negativity dominance, and contagion
| Authors | Rozin, Royzman |
| Journal | Personality and Social Psychology Review |
| Year | 2001 |
| Type | Published Paper |
| Abstract | We hypothesize that there is a general bias, based on both innatepredispositions and experience, in animals and humans, to give greater weight to negative entities (e.g., events, objects, personal traits). This is manifested in 4 ways: (a) negative potency (negative entities are stronger than the equivalent positive entities), (b) steeper negative gradients (the negativity of negative events grows more rapidly with approach to them in space or time than does the positivity of positive events, (c) negativity dominance (combinations of negative and positive entities yield evaluations that are more negative than the algebraic sum of individual subjective valences would predict), and (d) negative differentiation (negative entities are more varied, yield more complex conceptual representations, and engage a wider response repertoire). We review evidence for this taxonomy, with emphasis on negativity dominance, including literary, historical, religious, and cultural sources, as well as the psychological literatures on learning, attention, impression formation, contagion, moral judgment, development, and memory. We then consider a variety of theoretical accounts for negativity bias. We suggest that 1 feature of negative events that make them dominant is that negative entities are more contagious than positive entities. |
| URL | https://doi.org/10.1207/S15327957PSPR0504_2 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Media and Textual Analysis | Social Transmission Biases |
Work environment and individual background: Explaining regional shirking differentials in a large Italian firm
| Authors | Ichino, Maggi |
| Journal | Quarterly Journal of Economics |
| Year | 2000 |
| Type | Published Paper |
| Abstract | The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies; and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects, and sorting effects contribute to explaining the north-south shirking differential. None of the other explanations appears to be of first-order importance. |
| URL | https://doi.org/10.1162/003355300554890 |
| Tags | Archival Empirical | Propagation of Noise / Undesirable Outcomes |
The effect of socially activist investment policies on the financial markets: Evidence from the South African boycott
| Authors | Teoh, Welch, Wazzan |
| Journal | Journal of Business |
| Year | 1999 |
| Type | Published Paper |
| Abstract | We study the most important legislative and shareholder boycott to date, the boycott of South Africa's apartheid regime, and find that corporate involvement with South Africa was so small that the announcement of legislative/shareholder pressure or voluntary corporate divestment from South Africa had little discernible effect either on the valuation of banks and corporations with South African operations or on the South African financial markets. There is weak evidence that institutional shareholdings increased when corporations divested. In sum, despite the publicity of the boycott and the multitude of divesting companies, political pressure had little visible effect on the financial markets. |
| Keywords | Boycott, shareholder pressure, corporate divestment, firm valuation |
| URL | https://doi.org/10.1086/209602 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
The socio-economic dynamics of speculative markets: Interacting agents, chaos, and the fat tails of return distributions
| Authors | Lux |
| Journal | Journal of economic behavior & organization |
| Year | 1998 |
| Type | Published Paper |
| Abstract | This paper develops a model of the social and economic interaction of speculators in a securities or foreign exchange market. Both chartist and fundamentalist strategies are pursued by traders. The formalization of chartists behavior combines elements of mimetic contagion and trend chasing leading to waves of optimism or pessimism. Furthermore, changes of strategies from chartist to fundamentalist behavior and vice versa occur because speculators compare the performance of both strategies. The dynamic system under study encompasses the time development of the distribution of attitudes among traders as well as price adjustment. Chaotic attractors are found within a broad range of parameter values. The distributions of returns derived from chaotic trajectories of the model share important characteristics of empirical data: they exhibit high peaks around the mean as well as fat tails (leptokurtosis) and become less leptokurtotic under time aggregation. |
| Keywords | Herd behavior, bubbles, leptokurtosis |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0167268197000887 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |
Word-of-mouth communication and social learning
| Authors | Ellison, Fudenberg |
| Journal | Quarterly Journal of Economics |
| Year | 1995 |
| Type | Published Paper |
| Abstract | This paper studies the way that word-of-mouth communication aggregates the information of individual agents. We find that the structure of the communication process determines whether all agents end up making identical choices, with less communication making this conformity more likely. Despite the players' naive decision rules and the stochastic decision environment, word-of-mouth communication may lead all players to adopt the action that is on average superior. These socially efficient outcomes tend to occur when each agent samples only a few others. |
| URL | https://doi.org/10.2307/2118512 |
| Tags | Theory |
A theory of conformity
| Authors | Bernheim |
| Journal | Journal of Political Economy |
| Year | 1994 |
| Type | Published Paper |
| Abstract | This paper analyzes a model of social interaction in which individuals care about status as well as "intrinsic" utility (which refers to utility derived directly from consumption). Status is assumed to depend on public perceptions about an individual's predispositions rather than on the individual's actions. However, since predispositions are unobservable, actions signal predispositions and therefore affect status. When status is sufficiently important relative to intrinsic utility, many individuals conform to a single, homogeneous standard of behavior, despite heterogeneous underlying preferences. They are willing to conform because they recognize that even small departures from the social norm will seriously impair their status. The fact that society harshly censures all nonconformists is not simply assumed (indeed, status varies smoothly with perceived type); rather, it is produced endogenously. Despite this penalty, agents with sufficiently extreme preferences refuse to conform. The model provides an explanation for the fact that standards of behavior govern some activities but do not govern others. It also suggests a theory of how standards of behavior might evolve in response to changes in the distribution of intrinsic preferences. In particular, for some values of the preference parameters, norms are both persistent and widely followed; for other values, norms are transitory and confined to small groups. Thus the model produces both customs and fads. Finally, an extension of the model suggests an explanation for the development of multiple subcultures, each with its own distinct norm. |
| URL | https://www.jstor.org/stable/2138650 |
| Tags | Theory |
A simple model of herd behavior
| Authors | Banerjee |
| Journal | Quarterly Journal of Economics |
| Year | 1992 |
| Type | Published Paper |
| Abstract | We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient. |
| URL | https://doi.org/10.2307/2118364 |
| Tags | Theory |
A theory of fads, fashion, custom, and cultural change as informational cascades
| Authors | Bikhchandani, Hirshleifer, Welch |
| Journal | Journal of Political Economy |
| Year | 1992 |
| Type | Published Paper |
| Abstract | An informational cascade occurs when it is optimal for an individual, having observed the actions of those ahead of him, to follow the behavior of the preceding individual without regard to his own information. We argue that localized conformity of behavior and the fragility of mass behaviors can be explained by informational cascades. |
| URL | https://www.jstor.org/stable/2138632 |
| Tags | Theory |
Asset prices under habit formation and catching up with the joneses
| Authors | Abel |
| Journal | American Economic Review |
| Year | 1990 |
| Type | Published Paper |
| Abstract | This paper introduces a utility function that nests three classes of utility functions: 1) time-separable utility functions; 2) "catching up with the Joneses" utility functions that depend on the consumer's level of consumption relative to the lagged cross-sectional average level of consumption; and 3) utility functions that display habit formation. Incorporating this utility function into a Lucas (1978) asset pricing model allows calculation of closed-form solutions for the prices of stocks, bills and consols under the assumption that consumption growth is i.i.d. Then equilibrium asset prices are used to examine the equity premium puzzle. |
| URL | https://www.jstor.org/stable/2006539 |
| Tags | Theory |
Survey evidence on diffusion of interest and information among investors
| Authors | Shiller, Pound |
| Journal | Journal of Economic Behavior and Organization |
| Year | 1989 |
| Type | Published Paper |
| Abstract | Questionnaire surveys of institutional and individual investors were undertaken to learn about patterns of communications. It was found that direct interpersonal communications are very important in investor decisions. Questions elicited what fraction of investors were unsystematic and allowed themselves to be influenced by word-of-mouth communications or other salient stimuli. Randomly sampled investors were studied as well as investors in stocks whose price had recently increased dramatically. Contagion or epidemic models of financial markets are proposed in which interest in individual stocks is spread by word of mouth. The survey evidence is interpreted as supporting such models. |
| URL | https://doi.org/10.1016/0167-2681(89)90076-0 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) |
Stock prices and social dynamics
| Authors | Shiller, Fischer, Friedman |
| Journal | Brookings papers on economic activity |
| Year | 1984 |
| Type | Published Paper |
| Keywords | Social movements, social psychology, group pressure, fashions, fads, stock prices |
| URL | https://www.jstor.org/stable/2534436 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Theory |