Social networks and credit supply and demand
| Authors | Allen, Peng, Shan |
| Year | 2020 |
| Type | Working Paper |
| Abstract | Social networks are associated with the demand for and supply of consumer and small business loans originated on lending marketplaces. Loan demand increases substantially with past borrowing activities of geographically distant but socially connected areas, with an elasticity of 0.21. Borrower-area social proximity to deposits increases funding likelihood by 5.61% and improves ex-post loan performance. We establish causality with granular instrumental variables obtained from natural disasters (demand-side) and financial adviser misconduct (supply-side). The results suggest social networks improve capital allocation by increasing the awareness of alternative lending platforms and facilitating the transmission of less accessible information complementary to loan-specific data. |
| Keywords | Social network, online lending marketplaces, credit demand and supply, information transmission |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3537714 |
| Tags | Archival Empirical | Consumer Decisions | Financing- and Investment Decisions (Individual) | Social Network Structure |
Harnessing the wisdom of crowds
| Authors | Da, Huang |
| Journal | Management Science |
| Year | 2020 |
| Type | Published Paper |
| Abstract | When will a large group provide an accurate answer to a question involving quantity estimation? We empirically examine this question on a crowd-based corporate earnings forecast platform (Estimize.com). By tracking user activities, we monitor the amount of public information a user views before making an earnings forecast. We find that the more public information users view, the less weight they put on their own private information. Although this improves the accuracy of individual forecasts, it reduces the accuracy of the group consensus forecast because useful private information is prevented from entering the consensus. To address endogeneity concerns related to a user's information acquisition choice, we collaborate with Estimize.com to run experiments that restrict the information available to randomly selected stocks and users. The experiments confirm that "independent" forecasts result in a more accurate consensus. Estimize.com was convinced to switch to a "blind" platform from November 2015 on. The findings suggest that the wisdom of crowds can be better harnessed by encouraging independent voices from among group members and that more public information disclosure may not always improve group decision making. |
| Keywords | Wisdom of crowds, herding, naive learning, social learning, group decision making, earnings forecast |
| URL | https://pubsonline.informs.org/doi/10.1287/mnsc.2019.3294 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Investor memory
| Authors | Godker, Jiao, Smeets |
| Year | 2020 |
| Type | Working Paper |
| Abstract | How does memory shape individuals' financial decisions? We find experimental evidence of a self-serving memory bias. Subjects over-remember their own positive investment outcomes and under-remember negative ones. In contrast, subjects who did not invest but merely observed outcomes do not have this bias. The memory bias affects individual beliefs and decisions to re-invest. After investing, subjects form overly optimistic beliefs about their investment and re-invest even when doing so leads to a lower expected return. The memory bias is relevant for understanding how people learn from experiences in financial markets and has general implications for individual overconfidence and risk-taking. |
| Keywords | Memory, selective recall, beliefs, self-image, investor behavior, experimental finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3348315 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Financial literacy externalities
| Authors | Haliassos, Karabulut, Jansson |
| Journal | Review of Financial Studies |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This paper uses unique administrative data and a quasi-field experiment of exogenous allocation to apartments in Sweden to estimate medium- and longer-run effects on financial behavior from exposure to financially literate neighbors. It contributes evidence of causal impact of financial literacy and points to a social multiplier of effective programs to enhance it. Exposure promotes saving in private retirement accounts and stockholding, especially when neighbors have economics or business education, but only for educated or male-headed households. Findings point to relevant knowledge transfer through social interactions rather than to labor market or other channels linked to local economic conditions. |
| URL | https://doi.org/10.1093/rfs/hhz076 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Presidential address: Social transmission bias in economics and finance
| Authors | Hirshleifer |
| Journal | Journal of Finance |
| Year | 2020 |
| Type | Published Paper |
| Abstract | I discuss a new intellectual paradigm, social economics and finance--the study of the social processes that shape economic thinking and behavior. This emerging field recognizes that people observe and talk to each other. A key, underexploited building block of social economics and finance is social transmission bias: systematic directional shift in signals or ideas induced by social transactions. I use five "fables" (models) to illustrate the novelty and scope of the transmission bias approach, and offer several emergent themes. For example, social transmission bias compounds recursively, which can help explain booms, bubbles, return anomalies, and swings in economic sentiment. |
| Keywords | Social transmission bias, social economics, social finance, behavioral economics, behavioral finance, social networks, social learning, information percolation, biased percolation, epidemiology, visibility bias, self-enhancing transmission bias, simplistic thinking, memes, cultural evolution |
| URL | https://onlinelibrary.wiley.com/doi/pdf/10.1111/jofi.12906 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases | Theory |
Foreign-born resident networks and stock comovement: When local bias meets home (country) bias
| Authors | Meng, Pantzalis |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2020 |
| Type | Published Paper |
| Abstract | Foreign migration flows have important stock market consequences. Foreign-born resident networks within U.S. Metropolitan Statistical Areas (MSAs) are associated with excess return comovement between locally headquartered stocks and American Depositary Receipts (ADRs) from countries with ties to the MSA through the network of foreign-born residents. This comovement is hardly due to correlated fundamentals and at least partially driven by correlated trading within members of a common investor base consisting of foreign-born residents. Our evidence has implications for both investors and foreign multinational corporations (MNCs) seeking to reap benefits from cross-listings and is consistent with the notion that foreign-born residents exhibit both local bias and home (country) bias. |
| Keywords | Foreign migration, social networks, stock price behavior, international diversification |
| URL | https://doi.org/10.1017/S0022109020000976 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Social Network Structure |
Social collateral
| Authors | Nguyen, Dang |
| Year | 2020 |
| Type | Working Paper |
| Abstract | This paper studies the role of social stigma in debt repayment decisions, using a randomized field experiment with the borrowers of a retail bank. In our experiment, borrowers are randomly chosen to have their repayment status shared with an observer who is also randomly selected from a pre-existing list of the borrower's social connections. First, we find that receiving the social disclosure treatment significantly reduces delinquency, by 20% of the base rate. Second, estimates from the benchmarking treatments indicate that borrowers are willing to pay 9% of their monthly income to preserve their social image, not significantly less than they would pay to maintain a good credit report. Third, we combine the random variation in the assigned social contexts with heterogeneity in subject characteristics to examine why borrowers respond to reputational incentives. We find that borrowers are concerned that the revelation of delinquency can make them a less attractive match in social interactions such as in the labor market or the marriage market, i.e., the instrumental role of reputation. Our findings highlight the role of social social collateral as an alternative mechanism to enforce lending contracts and expand credit provision. |
| Keywords | Bank borrowing, social disclosure, reputational costs, debt repayment decision, social networks |
| URL | https://finance.darden.virginia.edu/wp-content/uploads/2020/08/Social-Collateral_062020.pdf |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Social networks, reputation, and commitment: Evidence from a savings monitors experiment
| Authors | Breza, Chandrasekhar |
| Journal | Econometrica |
| Year | 2019 |
| Type | Published Paper |
| Abstract | We conduct an experiment to study whether individuals save more when information about the progress toward their self-set savings goal is shared with another village member (a "monitor"). We develop a reputational framework to explore how a monitor's effectiveness depends on her network position. Savers who care about whether others perceive them as responsible should save more with central monitors, who more widely disseminate information, and proximate monitors, who pass information to individuals with whom the saver interacts frequently. We randomly assign monitors to savers and find that monitors on average increase savings by 36%. Consistent with the framework, more central and proximate monitors lead to larger increases in savings. Moreover, information flows through the network, with 63% of monitors telling others about the saver's progress. Fifteen months after the conclusion of the experiment, other villagers have updated their beliefs about the saver's responsibility in response to the intervention. |
| Keywords | Commitment, reputation, savings, social networks. |
| URL | https://onlinelibrary.wiley.com/doi/abs/10.3982/ECTA13683 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Identity and choice under risk
| Authors | D'Acunto |
| Year | 2019 |
| Type | Working Paper |
| Abstract | I test a set of predictions that constitute an identity theory of choice under risk using large-scale artefactual field experiments. Men whose identity is primed or threatened invest more in risky opportunities than other men and women. They become overconfident even in pure games of chance with no scope for skill, which is consistent with the motivated-beliefs channel identity theory postulates. The effects are stronger for men who are more likely to commit to male identity - older men and men in the Southern US. I show identity theory can contribute to explain negative-expected-value investment by risk-averse agents (e.g., trading individual stocks) and overinvestment in delegated choice under risk (e.g., managerial overinvestment) using simple financial opportunities. Because behaving in line with their identity increases men's utility, departures from expected utility theory are not necessarily suboptimal in this identity theory of choice under risk. |
| Keywords | Cultural finance, expectations, motivated beliefs, behavioral finance, overconfidence, financial decision-making, risk attitudes, heterogeneous agents, cultural economics |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3466626 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
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 |
Foreclosure contagion and the neighborhood spillover effects of mortgage defaults
| Authors | Gupta |
| Journal | Journal of Finance |
| Year | 2019 |
| Type | Published Paper |
| Abstract | In this paper, I identify shocks to interest rates resulting from two administrative details in adjustable-rate mortgage contract terms: the choice of financial index and the choice of lookback period. I find that a 1 percentage point increase in interest rate at the time of adjustable-rate mortgage (ARM) reset results in a 2.5 percentage increase in the probability of foreclosure in the following year, and that each foreclosure filing leads to an additional 0.3 to 0.6 completed foreclosures within a 0.10-mile radius. In explaining this result, I emphasize price effects, bank-supply responses, and borrower responses arising from peer effects. |
| URL | https://doi.org/10.1111/jofi.12821 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
Learning from coworkers: Peer effects on individual investment decisions
| Authors | Ouimet, Tate |
| Journal | Review of Financial Studies |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Using unique data on employee stock purchase plans (ESPPs), we examine the influence of networks on investment decisions. Comparing employees within a firm during the same election window with metro area fixed effects, we find that the choices of coworkers in the firm's ESPP exert a significant influence on employees' own decisions to participate and trade. Moreover, we find that the presence of high-information employees magnifies the effects of peer networks. Given participation in an ESPP is value-maximizing, our analysis suggests the potential of networks and targeted investor education to improve financial decision-making. |
| URL | https://doi.org/10.1111/jofi.12830 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
How do investment ideas spread through social interaction? Evidence from a Ponzi scheme
| Authors | Rantala |
| Journal | Journal of Finance |
| Year | 2019 |
| Type | Published Paper |
| Abstract | A unique data set from a large Ponzi scheme allows me to study word-of-mouth diffusion of investment information. Investors could join the scheme only by invitation from an existing member, which allows me to observe how the idea spreads from one person to the next based on inviter-invitee relationships. I find that the observed social network has a scale-free connectivity structure, which significantly facilitates the diffusion of the investment idea and contributes to the growth and survival of the socially spreading Ponzi scheme. I further find that investors invest more if their inviter has comparatively higher age, education, and income. |
| URL | https://doi.org/10.1111/jofi.12822 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Narrative economics: how stories go viral and drive major economic events
| Authors | Shiller |
| Book | Narrative Economics |
| Year | 2019 |
| Type | Book |
| Abstract | Stories people tell-about financial confidence or panic, housing booms, or Bitcoin-can go viral and powerfully affect economies, but such narratives have traditionally been ignored in economics and finance because they seem anecdotal and unscientific. In this groundbreaking book, Robert Shiller explains why we ignore these stories at our peril-and how we can begin to take them seriously. Using a rich array of examples and data, Shiller argues that studying popular stories that influence individual and collective economic behavior-what he calls "narrative economics"-may vastly improve our ability to predict, prepare for, and lessen the damage of financial crises and other major economic events. The result is nothing less than a new way to think about the economy, economic change, and economics. In a new preface, Shiller reflects on some of the challenges facing narrative economics, discusses the connection between disease epidemics and economic epidemics, and suggests why epidemiology may hold lessons for fighting economic contagions. |
| Keywords | COVID-19, coronavirus, H1N1, Wuhan, Spanish flu, Spanish influenza, influenza, Ebola polio disease, 1918 flu epidemic, Great Recession, 1929 financial epidemic, pandemic, co-epidemic, contagion, market meltdown, stock crash, bubble, panic, epidemiology, world financial crisis, virality, disease, stimulus, fear, bank runs, bank failures, behavioral economics, consumer confidence, crowd psychology, crisis of confidence, crisis, mutation, conspiracy theories, fake news, false narratives, chaos theory, butterfly effect, John Maynard Keynes |
| URL | https://doi.org/10.1515/9780691212074 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
The economic effects of social networks: Evidence from the housing market
| Authors | Bailey, Cao, Kuchler, Stroebel |
| Journal | Journal of Political Economy |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We show how data from online social networking services can help researchers better understand the effects of social interactions on economic decision making. We combine anonymized data from Facebook, the largest online social network, with housing transaction data and explore both the structure and the effects of social networks. Individuals whose geographically distant friends experienced larger recent house price increases are more likely to transition from renting to owning. They also buy larger houses and pay more for a given house. Survey data show that these relationships are driven by the effects of social interactions on individuals' housing market expectations. |
| URL | https://www.journals.uchicago.edu/doi/abs/10.1086/700073 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Social and cultural issues in finance
| Authors | Cronqvist |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2018 |
| Type | Published Paper | Literature Review Paper |
| Keywords | Social networks, social capital, social preferences, financial decision, asset pricing, corporate governance |
| URL | https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/virtual-special-issues/jfqa-virtual-issue-2 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
The promises and pitfalls of robo-advising
| Authors | D'Acunto, Prabhala, Rossi |
| Journal | Review of Financial Studies |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We study the introduction of a wealth-management robo-adviser that constructs portfolios tailored to investors' holdings and preferences. Adopters are similar to non-adopters in terms of demographics and prior interactions with human advisers but tend to be more active and have greater assets under management. Investors adopting robo-advising experience diversification benefits. Ex ante undiversified investors increase stock holdings and hold portfolios with less volatility and better returns. Already well-diversified investors hold fewer stocks, yet see some reduction in volatility, and trade more after adoption. All investors increase attention based on online account logins. We find that adopters exhibit declines in prominent behavioral biases, including the disposition, trend chasing, and rank effect. Our results emphasize the promises and pitfalls of robo-advising tools, which are becoming ubiquitous all over the world. |
| Keywords | Investment decisions, technological innovation, portfolio management, behavioral biases |
| URL | https://academic.oup.com/rfs/article/32/5/1983/5427774?login=true |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
Historical antisemitism, ethnic specialization, and financial development
| Authors | D'Acunto, Prokopczuk, Weber |
| Journal | Review of Economic Studies |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Historically, European Jews have specialized in financial services while being the victims of antisemitism. We find that the present-day demand for finance is lower in German counties where historical antisemitism was higher, compared to otherwise similar counties. Households in counties with high historical antisemitism have similar saving rates but invest less in stocks, hold lower saving deposits, and are less likely to get a mortgage to finance homeownership after controlling for wealth and a rich set of current and historical covariates. Present-day antisemitism and supply-side forces do not fully explain the results. Households in counties where historical antisemitism was higher distrust the financial sector more-a potential cultural externality of historical antisemitism that reduces wealth accumulation in the long run. |
| Keywords | Cultural economics, cultural finance, intergenerational transmission of norms, stereotypes, household finance, history & finance. |
| URL | https://doi.org/10.1093/restud/rdy021 |
| Tags | Archival Empirical | Evolutionary Finance | Financing- and Investment Decisions (Individual) |
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) |