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 |
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 |
Can social media distort price discovery? Evidence from merger rumors
| Authors | Jia, Redigolo, Shu, Zhao |
| Journal | Journal of Accounting and Economics |
| Year | 2020 |
| Type | Published Paper |
| Abstract | We study whether social media can play a negative information role by impeding price discovery in the presence of highly speculative rumors. We focus on merger rumors, where most do not materialize. We find that merger rumors accompanied by greater Twitter activity elicit greater immediate market reaction even though rumor-related Twitter activity is unrelated to the probability of merger realization. The price distortion associated with tweet volume persists weeks after a rumor and reverses only after eight weeks. The price distortion is more pronounced for rumors tweeted by Twitter users with greater social influence, for target firms with low institutional ownership, and for rumors that supply more details. Our evidence suggests that social media can be a rumor mill that hinders the market's price discovery of potentially false information. |
| Keywords | Social media, Twitter, merger and acquisition, rumor, merger rumor, persuasion bias |
| URL | https://econpapers.repec.org/article/eeejaecon/v_3a70_3ay_3a2020_3ai_3a1_3as0165410120300367.htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Propagation of Noise / Undesirable Outcomes |
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 |
Behavioral and social corporate finance
| Authors | Cronqvist, Pely |
| Book | Oxford Research Encyclopedia of Economics and Finance |
| Year | 2019 |
| Type | Book | Literature Review Paper |
| Abstract | Corporate finance is about understanding the determinants and consequences of the investment and financing policies of corporations. In a standard neoclassical profit maximization framework, rational agents, that is, managers, make corporate finance decisions on behalf of rational principals, that is, shareholders. Over the past two decades, there has been a rapidly growing interest in augmenting standard finance frameworks with novel insights from cognitive psychology, and more recently, social psychology and sociology. This emerging subfield in finance research has been dubbed behavioral corporate finance, which differentiates between rational and behavioral agents and principals. The presence of behavioral shareholders, that is, principals, may lead to market timing and catering behavior by rational managers. Such managers will opportunistically time the market and exploit mispricing by investing capital, issuing securities, or borrowing debt when costs of capital are low and shunning equity, divesting assets, repurchasing securities, and paying back debt when costs of capital are high. Rational managers will also incite mispricing, for example, cater to non-standard preferences of shareholders through earnings management or by transitioning their firms into an in-fashion category to boost the stock's price. The interaction of behavioral managers, that is, agents, with rational shareholders can also lead to distortions in corporate decision making. For example, managers may perceive fundamental values differently and systematically diverge from optimal decisions. Several personal traits, for example, overconfidence or narcissism, and environmental factors, for example, fatal natural disasters, shape behavioral managers' preferences and beliefs, short or long term. These factors may bias the value perception by managers and thus lead to inferior decision making. An extension of behavioral corporate finance is social corporate finance, where agents and principals do not make decisions in a vacuum but rather are embedded in a dynamic social environment. Since managers and shareholders take a social position within and across markets, social psychology and sociology can be useful to understand how social traits, states, and activities shape corporate decision making if an individual's psychology is not directly observable. |
| Keywords | behavioral finance, social finance, corporate finance, market efficiency, cognitive biases, limits of arbitrage, limits of governance |
| URL | https://doi.org/10.1093/acrefore/9780190625979.013.427 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
The relevance of broker networks for information diffusion in the stock market
| Authors | Di Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X1930087X |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
The relevance of broker networks for information diffusion in the stock market
| Authors | Maggio, Franzoni, Kermani, Sommavilla |
| Journal | Journal of Financial Economics |
| Year | 2019 |
| Type | Published Paper |
| Abstract | This paper shows that the network of relationships between brokers and institutional investors shapes information diffusion in the stock market. Central brokers gather information by executing informed trades, which is then leaked to their best clients. After large informed trades, other institutional investors are significantly more likely to execute similar trades through the same broker, allowing them to capture returns that are twice as large as their normal trading performance. Also indicative of information leakage, the clients of the broker employed by activist investors to execute their trades buy the same stocks just before the filing of the 13D. |
| Keywords | Brokers, institutional investors, social networks, informed trading, market efficiency |
| URL | https://doi.org/10.1016/j.jfineco.2019.04.002 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | 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 |
Can Twitter help predict firm-level earnings and stock returns?
| Authors | Bartov, Faurel, Mohanram |
| Journal | The Accounting Review |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Prior research has examined how companies exploit Twitter in communicating with investors, and whether Twitter activity predicts the stock market as a whole. We test whether opinions of individuals tweeted just prior to a firm's earnings announcement predict its earnings and announcement returns. Using a broad sample from 2009 to 2012, we find that the aggregate opinion in individual tweets successfully predicts a firm's forthcoming quarterly earnings and announcement returns. These results hold for tweets that convey original information, as well as tweets that disseminate existing information, and are stronger for tweets providing information directly related to firm fundamentals and stock trading. Importantly, our results hold even after controlling for concurrent information or opinion from traditional media sources, and are stronger for firms in weaker information environments. Our findings highlight the importance of considering the aggregate opinion in individual tweets when assessing stocks' future prospects and value. |
| Keywords | Twitter, social media, wisdom of crowds, earnings, analyst earnings forecast, abnormal stock returns |
| URL | https://publications.aaahq.org/accounting-review/article-abstract/93/3/25/4062/Can-Twitter-Help-Predict-Firm-Level-Earnings-and?redirectedFrom=fulltext |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Media and Textual Analysis |
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) |
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) |
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 |
Corporate environmental policy and shareholder value: Following the smart money
| Authors | Fernando, Sharfman and Uysal |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the value consequences of corporate social responsibility through the lens of institutional shareholders. We find a sharp asymmetry between corporate policies that mitigate the firm's exposure to environmental risk and those that enhance its perceived environmental friendliness ("greenness"). Institutional investors shun stocks with high environmental risk exposure, which we show have lower valuations, as predicted by risk management theory. These findings suggest that corporate environmental policies that mitigate environmental risk exposure create shareholder value. In contrast, firms that increase greenness do not create shareholder value and are also shunned by institutional investors. |
| Keywords | Corporate environmental policy, CSR, shareholder value, institutional investors, firm value |
| URL | https://doi.org/10.1017/S0022109017000680 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social screens and systematic investor boycott risk
| Authors | Luo, Balvers |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We model the pricing implications of screens adopted by socially responsible investors. The model reproduces the empirically observed abnormal return to sin stock and implies a premium for systematic investor boycott risk that affects targeted as well as nontargeted firms. The investor boycott premium is not displaced by litigation risk, measures of neglect effect, illiquidity, industry momentum, or concentration. The investor boycott risk factor is useful in explaining mean returns across industries, and its premium varies with the relative wealth of socially responsible investors and the business cycle. |
| Keywords | Socially responsible investing, sin stocks, boycott risk premium, stock returns |
| URL | https://doi.org/10.1017/S0022109016000910 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Theory |
Narrative economics
| Authors | Shiller |
| Journal | American Economic Review |
| Year | 2017 |
| Type | Published Paper | Literature Review Paper |
| Abstract | This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives "go viral" and spread far, even worldwide, with economic impact. The 1920-1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007-2009, and the contentious political-economic situation of today are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future. |
| Keywords | Narrative, social psychology, social epidemics, economic behaviors |
| URL | https://www.aeaweb.org/articles?id=10.1257%2Faer.107.4.967&msclkid=bd5677ccaa8411ec80ac1e25c5639856 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes |
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 |
Peer pressure: Social interaction and the disposition effect
| Authors | Heimer |
| Journal | The Review of Financial Studies |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage. |
| URL | https://econpapers.repec.org/article/ouprfinst/v_3a29_3ay_3a2016_3ai_3a11_3ap_3a3177-3209..htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
Religion and stock price crash risk
| Authors | Callen, Fang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2015 |
| Type | Published Paper |
| Abstract | This study examines whether religiosity at the county level is associated with future stock price crash risk. We find robust evidence that firms headquartered in counties with higher levels of religiosity exhibit lower levels of future stock price crash risk. This finding is consistent with the view that religion,as a set of social norms, helps to curb bad-news-hoarding activities by managers. Our evidence further shows that the negative relation between religiosity and future crash risk is stronger for riskier firms and for firms with weaker governance mechanisms measured by shareholder takeover rights and dedicated institutional ownership. |
| Keywords | Religion, social norms, stock crash, corporate governance |
| URL | https://doi.org/10.1017/S0022109015000046 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior |