Crowdsourcing financial information to change spending behavior
| Authors | D'Acunto, Rossi, Weber |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We document five effects of providing individuals with crowdsourced spending information about their peers (individuals with similar characteristics) through a FinTech app. First, users who spend more than their peers reduce their spending significantly, whereas users who spend less keep constant or increase their spending. Second, users' distance from their peers' spending affects the reaction monotonically in both directions. Third, users' reaction is asymmetric - spending cuts are three times as large as increases. Fourth, lower-income users react more than others. Fifth, discretionary spending drives the reaction in both directions and especially cash withdrawals, which are commonly used for incidental expenses and anonymous transactions. We argue Bayesian updating, peer pressure, or the fact that bad news looms more than (equally-sized) good news cannot alone explain all these facts. |
| Keywords | FinTech, learning, beliefs and expectations, peer pressure, financial decision-making, saving, consumer finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3348722 |
| Tags | Archival Empirical | Consumer Decisions | Financing- and Investment Decisions (Individual) | Social Network Structure |
Active trading and (poor) performance: The social transmission channel
| Authors | Escobar, Pedraza |
| Year | 2019 |
| Type | Working Paper |
| Abstract | Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are 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 favorable peer returns on single-stock transactions stimulate market entry among inexperienced investors, even when total portfolio performance among peers is negative. The results are consistent with selective communication: individuals with trading background share their most favorable trades, which attracts others to the stock market. Inexperienced individuals who are exposed to peers with large returns on single trades appear to overestimate the value of active trading. The paper finds that these rookie investors make more stock transactions, trade more speculatively, but also generate inferior returns. The findings show the strength of social communication as a key determinant of financial decision making. |
| Keywords | Stock market participation, peer effects, active trading |
| URL | http://hdl.handle.net/10986/31361 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
Visibility bias in the transmission of consumption beliefs and undersaving
| Authors | Han, Hirshleifer, Walden |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We model visibility bias in the social transmission of consumption behavior. When consumption is more salient than non-consumption, people perceive that others are consuming heavily, and infer that future prospects are favorable. This increases aggregate consumption in a positive feedback loop. A distinctive implication is that disclosure policy interventions can ameliorate undersaving. In contrast with wealth-signaling models, information asymmetry about wealth reduces overconsumption. The model predicts that saving is influenced by social connectedness, observation biases, and demographic structure; and provides a novel explanation for the dramatic drop in savings rates in the US and several other countries in recent decades. |
| URL | https://www.nber.org/papers/w25566 |
| Tags | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases | Theory |
Corporate culture as an implicit contract
| Authors | Jeffers, Lee |
| Year | 2019 |
| Type | Working Paper |
| Abstract | We develop a measure of corporate culture using coworker connectivity on LinkedIn's platform, and show it is strongly correlated with positive employee relations and satisfaction. Using state-level changes to employment agreements as shocks to explicit contracts, we find that these changes significantly impact employees in weakly connected firms, but have little to no effect on those at strongly connected firms. Our results suggest that firms with strong corporate culture are less dependent on explicit contracts to retain human capital. We document implications for firms' investment decisions and other outcomes. |
| Keywords | Corporate culture, human capital, implicit contracts, non-competes |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3426060 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Social Network Structure |
From extreme to mainstream: How social norms unravel
| Authors | Bursztyn, Egorov, Fiorin |
| Year | 2018 |
| Type | Working Paper |
| Abstract | Social norms are typically thought to be persistent and long-lasting, sometimes surviving through growth, recessions, and regime changes. In some cases, however, they can quickly change. This paper examines the unraveling of social norms in communication when new information becomes available, e.g., aggregated through elections. We build a model of strategic communication between citizens who can hold one of two mutually exclusive opinions. In our model, agents communicate their opinions to each other, and senders care about receivers' approval. As a result, senders are more likely to express the more popular opinion, while receivers make less inference about senders who stated the popular view. We test these predictions using two experiments. In the main experiment, we identify the causal effect of Donald Trump's rise in political popularity on individuals' willingness to publicly express xenophobic views. Participants in the experiment are offered a bonus reward if they authorize researchers to make a donation to an anti-immigration organization on their behalf. Participants who expect their decision to be observed by the surveyor are significantly less likely to accept the offer than those expecting an anonymous choice. Increases in participants' perceptions of Trump's popularity (either through experimental variation or through the "natural experiment" of his victory) eliminate the wedge between private and public behavior. A second experiment uses dictator games to show that participants judge a person less negatively for publicly expressing (but not for privately holding) a political view they disagree with if that person's social environment is one where the majority of people holds that view. |
| Keywords | Social communication, belief updates, experiment |
| URL | https://www.nber.org/papers/w23415 |
| Tags | Experimental / Survey-Based Empirical | Social Network Structure | Theory |
Peer financial distress and individual leverage: Evidence from 30 million individuals
| Authors | Kalda |
| Year | 2018 |
| Type | Working Paper |
| Abstract | Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more following peer distress. The estimates suggest that these peer effects can explain a decline of up to $213.31 billion in household debt between 2011 and 2015, corresponding to 1.82% of total household debt in 2011. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism. |
| URL | https://www.stern.nyu.edu/sites/default/files/assets/documents/Kalda_03312018.pdf |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Partisan bias, economic expectations, and household spending
| Authors | Mian, Sufi, Khoshkhou |
| Year | 2018 |
| Type | Working Paper |
| Abstract | The well-documented rise in political polarization among the U.S. electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on survey-based measures of economic expectations. Individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party that controls the White House, and this tendency has increased significantly over time. Individuals report a large shift in economic expectations based on partisan affiliation after the 2008 and 2016 elections, but administrative data on spending shows no effect of these shifts on actual household spending. |
| Keywords | Consumer confidence, government, economic, policy, sentiment, news, noise, spending, consumption, elections, voting, polarization, Trump, elections |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2620828 |
| Tags | Archival Empirical | Consumer Decisions | Experimental / Survey-Based Empirical |
In the red: The effects of color on investment behavior
| Authors | Bazley, Cronqvist, Mormann |
| Year | 2017 |
| Type | Working Paper |
| Abstract | Financial decisions in today's society are made in environments that involve color stimuli. In this paper, we perform an empirical analysis of the effects of color on investment behavior. First, we find that when investors are displayed potential losses in red, risk taking is reduced. Second, when investors are shown past negative stock price paths in red, expectations about future stock returns are reduced. Consistent with red causing "avoidance behavior", red color reduces investors' propensity to purchase stocks. The findings are robust to a series of checks involving colorblind investors and alternative colors to control for salience effects. Finally, the effects are muted in a cultural setting, e.g., China, where red is not used to visualize financial losses. A contribution of this study is to introduce hypotheses from color psychology and visual science to enhance our understanding of the behavior of individual investors. |
| Keywords | Visual finance, investor behavior, cultural finance |
| URL | https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/paper-cronqvist.pdf |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Credit scores, social capital, and stock market participation
| Authors | Bricker, Li |
| Year | 2017 |
| Type | Working Paper |
| Abstract | While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities. |
| Keywords | Credit scores, social capital, stock market participation, trust |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911760 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Innovating to invest: The role of basic education
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper |
| Abstract | Despite the focus of entrepreneurial finance research on high-tech innovation, more than 75% of innovations are new processes and products in traditional manufacturing. I show that basic education is a key determinant of innovation in traditional industries. I document that manufacturers in European regions with 10% more high school graduates file 15% more patents, and invest 4% more in capital expenditures. To absorb spatially correlated unobservables, I construct Virtual Regions that only exploit the variation in basic education across nearby locations. To address the possibility of reverse causality, I establish that regional basic education persists for decades, and I use the quasi-exogenous diffusion of the printing press after 1450 to instrument for historical basic education. The results offer a human capital channel for innovation that feeds into the innovation-to-investment literature in finance. |
| Keywords | Enterprise innovation, human capital investment, historical shocks, literacy distribution |
| URL | https://www.eief.it/files/2015/01/02-jmp-eief_dacunto.pdf |
| Tags | Archival Empirical | Evolutionary Finance | Experimental / Survey-Based Empirical | Manager / Firm Behavior | Productivity Spillovers |
From financial history to history & finance
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper | Literature Review Paper |
| Abstract | Financial history studies facts and institutions of the past. Such facts and institutions are interesting subjects in themselves, or they can help us interpret the present through analogy. History & Finance reverses the role of history in finance research: it exploits natural experiments of the past as a means to directly explaining current financial outcomes through the long-run persistence of economic and social phenomena. I first define the History & Finance approach and its relationship to Economic and Financial history. Then, I survey the work based on History & Finance across the subfields of finance. I discuss the challenges raised by History & Finance, and how researchers have thus far tackled them. Finally, I comment on the avenues for future research that History & Finance opens to finance scholars and economic historians alike. |
| Keywords | Historical facts, institutional backgrounds, natural experiments, history & finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3216109 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Manager / Firm Behavior |
Pockets of poverty: The long-term effects of redlining
| Authors | Appel, Nickerson |
| Year | 2016 |
| Type | Working Paper |
| Abstract | This paper studies the long-term effects of redlining policies that restricted access to credit in urban communities. For empirical identification, we use a regression discontinuity design that exploits boundaries from maps created by the Home Owners Loan Corporation (HOLC) in 1940. We find that "redlined" neighborhoods have 4.8% lower home prices in 1990 relative to adjacent areas. This finding is robust to the exclusion of boundaries that coincide with the physical features of cities (e.g., rivers, landmarks). Moreover, we show that housing characteristics varied smoothly at the boundaries when the maps were created. Evidence suggests lower property values may be driven by negative externalities associated with fewer owner-occupied homes and more vacant structures. Overall, our results indicate the effects of discriminatory credit rationing can persist decades after such practices are formally discontinued. |
| Keywords | Redlining, credit rationing, household finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852856 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
Social networks and housing markets
| Authors | Baily, Cao, Kuchler, Stroebel |
| Year | 2016 |
| Type | Working Paper |
| Abstract | We document that the recent house price experiences within an individual's social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new methodology to document large effects of housing market expectations on individual housing investment decisions and aggregate housing market outcomes. Our approach exploits plausibly-exogenous variation in the recent house price experiences of individuals' geographically-distant friends as shifters of those individuals' local housing market expectations. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, (iii) pay 3.3 percent more for a given house, and (iv) make a 7% larger downpayment. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We also find that when individuals observe a higher dispersion of house price experiences across their friends, this has a negative effect on their housing investments. Finally, we show that these individual-level responses aggregate up to affect county-level house prices and trading volume. Our findings suggest that the house price experiences of geographically-distant friends might provide a valid instrument for local house price growth. |
| Keywords | House price, social contagion, investor behaviors, market expectation |
| URL | https://www.nber.org/papers/w22258 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
Tear down this wall street: Anti-market rhetoric, motivated beliefs, and investment
| Authors | D'Acunto |
| Year | 2015 |
| Type | Working Paper |
| Abstract | Anti-market ideology pre-exists modern capitalism, is diffused in capitalistic economies, and peaks during economic crises. Is anti-market ideology an inert cultural by-product of crises, or does it affect economic decision making? If it does, through which channels? I manipulate exposure to anti-market ideology in an artefactual field experiment. Subjects exposed to anti-market ideology invest less often and less money in risky financial opportunities than controls. The effect is stronger for women, older, and college-educated subjects. Risk aversion does not change with exposure. Instead, treated subjects have a more negative view of the financial sector, even if they do not realize they are exposed to anti-market ideology. They react to positive news but not to negative news regarding investment payoffs in subsequent investment choices. These results are consistent with context-dependent beliefs. Contrary to behavioral biases, anti-market ideology makes more sophisticated agents deviate from neoclassical decision-making. |
| Keywords | Cultural economics, behavioral finance, norms and values, context-dependent beliefs, trust, priming |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705545 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Facebook finance: How social interaction propagates active investing
| Authors | Heimer, Simon |
| Year | 2015 |
| Type | Working Paper |
| Abstract | This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader's good short-term performance causes them to contact others. A trader's activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders. |
| URL | https://EconPapers.repec.org/RePEc:fip:fedcwp:1522 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Network effects on worker productivity
| Authors | Lindquist, Sauermann, Zenou |
| Year | 2015 |
| Type | Working Paper |
| Abstract | We use data from an in-house call center of a multi-national mobile network operator to study how co-worker productivity affects worker productivity via network effects. We also exploit data from a field experiment to analyze how exogenous changes in worker productivity due to on-the-job training affect co-worker productivity, including non-trained workers. We show that there are strong network effects in co-worker productivity. This effect is driven by conformist behavior. We also show that exposure to trained workers increases the productivity of non-trained workers. This effect works through strategic complementarities (knowledge spillovers). We demonstrate how our network model of worker productivity can be used to inform a variety of practical decisions faced by personnel managers including the design of optimal training policy. |
| Keywords | On-the-job training, peer effects, social networks, worker productivity |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2689150 |
| Tags | Experimental / Survey-Based Empirical | Productivity Spillovers |
The diffusion of microfinance
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Year | 2013 |
| Type | Working Paper |
| Abstract | We examine how participation in a microfinance program diffuses through social networks. We collected detailed demographic and social network data in 43 villages in South India before microfinance was introduced in those villages and then tracked eventual participation. We exploit exogenous variation in the importance (in a network sense) of the people who were first informed about the program, "the injection points". Microfinance participation is higher when the injection points have higher eigenvector centrality. We estimate structural models of diffusion that allow us to (i) determine the relative roles of basic information transmission versus other forms of peer influence, and (ii) distinguish information passing by participants and non-participants. We find that participants are significantly more likely to pass information on to friends and acquaintances than informed non-participants, but that information passing by non-participants is still substantial and significant, accounting for roughly a third of informedness and participation. We also find that, conditioned on being informed, an individual's decision is not significantly affected by the participation of her acquaintances. |
| Keywords | Social network centralities, information transmission, microfinance program |
| URL | https://www.nber.org/papers/w17743 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Digitizing doctor demand: The impact of online reviews on doctor choice
| Authors | Luca, Vats |
| Year | 2013 |
| Type | Working Paper |
| Abstract | We present empirical evidence for the impact of patient reviews on consumers' physician choices. Our study is based on ZocDoc.com - a unique website that integrates patient reviews, and appointment scheduling for physicians on one platform. Using ZocDoc we construct a novel data set consisting of all reviews written for primary care physicians in Manhattan, New York. We then pair these reviews with data on appointments that are booked through ZocDoc, during February-May, 2013. Our data suggest that patient reviews are becoming an important source of reputation for physicians. About 25% of New York primary care physicians are now listed on ZocDoc, and 84% of them have at least 5 reviews. Because ZocDoc displays each physician's rounded average rating to patients, we can use regression discontinuity to identify the causal impact of patient ratings on patient demand. We find that half a star improvement in ratings, on a scale of 1 to 5 stars, leads to a 10% increase in the likelihood, at the mean, that a doctor will fill an appointment. |
| URL | https://www.aeaweb.org/conference/2014/retrieve.php?pdfid=55.%20Accessed%205/23/18 |
| Tags | Archival Empirical | Consumer Decisions |
Peer effects and loan repayment: Evidence from the Krishna default crisis
| Authors | Breza |
| Year | 2012 |
| Type | Working Paper |
| Abstract | Around the world, microfinance ties borrowers together using group repayment meetings, shared oaths and often, joint liability. Microfinance institutions (MFIs) have invested heavily in building social capital and generally boast stellar repayment rates. However, recent repayment crises have fueled speculation that peer effects might also reinforce default behavior. I estimate the causal effect of peer repayment on individuals' repayment decisions in the absence of joint liability following a district-level default in which 100% of borrowers temporarily defaulted on their loans and after which borrowers gradually decided whether to repay. Because the defaults occurred simultaneously, the timing of the shock induced variation in repayment incentives both at the individual and peer group levels. Individuals (or peer groups) near the end of their 50-week loan cycles were closest to receiving new loans and had the strongest incentives to repay; those who had recently received disbursements had the weakest. Using the variation in the peer group's incentives to instrument for peer repayment, I find that if a borrower's peers shift from full default to full repayment, she is 10-15pp more likely to repay. Last, I present a dynamic discrete choice model of the repayment decision to estimate the net benefit of the peer mechanism to the MFI. Repayers' positive influence on others (not non-repayers' negative influence) mainly drives the effect. Thus, peer effects actually improve repayment rates relative to a counterfactual without peer effects. |
| URL | https://www0.gsb.columbia.edu/mygsb/faculty/research/pubfiles/6030/Draft_2013_april_v2.pdf |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Reviews, reputation, and revenue: The case of Yelp.Com
| Authors | Luca |
| Year | 2011 |
| Type | Working Paper |
| Abstract | Do online consumer reviews affect restaurant demand? I investigate this question using a novel dataset combining reviews from the website Yelp.com and restaurant data from the Washington State Department of Revenue. Because Yelp prominently displays a restaurant's rounded average rating, I can identify the causal impact of Yelp ratings on demand with a regression discontinuity framework that exploits Yelp's rounding thresholds. I present three findings about the impact of consumer reviews on the restaurant industry: (1) a one-star increase in Yelp rating leads to a 5-9 percent increase in revenue, (2) this effect is driven by independent restaurants; ratings do not affect restaurants with chain affiliation, and (3) chain restaurants have declined in market share as Yelp penetration has increased. This suggests that online consumer reviews substitute for more traditional forms of reputation. I then test whether consumers use these reviews in a way that is consistent with standard learning models. I present two additional findings: (4) consumers do not use all available information and are more responsive to quality changes that are more visible and (5) consumers respond more strongly when a rating contains more information. Consumer response to a restaurant's average rating is affected by the number of reviews and whether the reviewers are certified as "elite" by Yelp, but is unaffected by the size of the reviewers' Yelp friends network. |
| URL | https://ssrn.com/abstract=1928601 |
| Tags | Archival Empirical | Consumer Decisions |