Social finance as cultural evolution, transmission bias, and market dynamics
| Authors | Akcay, Hirshleifer |
| Journal | Proceedings of the National Academy Sciences of the United States of America |
| Year | 2021 |
| Type | Published Paper |
| Abstract | The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment. |
| Keywords | Evolutionary finance, cultural evolution, social interaction, behavioral economics, social finance |
| URL | https://doi.org/10.1073/pnas.2015568118 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Social Network Structure | Social Transmission Biases | Theory |
Social finance as cultural evolution, transmission bias, and market dynamics
| Authors | Akcay, Hirshleifer |
| Journal | Proceedings of the National Academy of Sciences |
| Year | 2021 |
| Type | Published Paper | Literature Review Paper |
| Abstract | The thoughts and behaviors of financial market participants depend upon adopted cultural traits, including information signals, beliefs, strategies, and folk economic models. Financial traits compete to survive in the human population and are modified in the process of being transmitted from one agent to another. These cultural evolutionary processes shape market outcomes, which in turn feed back into the success of competing traits. This evolutionary system is studied in an emerging paradigm, social finance. In this paradigm, social transmission biases determine the evolution of financial traits in the investor population. It considers an enriched set of cultural traits, both selection on traits and mutation pressure, and market equilibrium at different frequencies. Other key ingredients of the paradigm include psychological bias, social network structure, information asymmetries, and institutional environment. |
| Keywords | Evolutionary finance, cultural evolution, social interaction, behavioral economics, social finance |
| URL | https://www.pnas.org/doi/10.1073/pnas.2015568118 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Consumer Decisions | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
Folklore
| Authors | Michalopoulos, Xue |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Folklore is the collection of traditional beliefs, customs, and stories of a community passed through the generations by word of mouth. We introduce to economics a unique catalogue of oral traditions spanning approximately 1,000 societies. After validating the catalogueâs content by showing that the groupsâ motifs reflect known geographic and social attributes, we present two sets of applications. First, we illustrate how to fill in the gaps and expand upon a groupâs ethnographic record, focusing on political complexity, high gods, and trade. Second, we discuss how machine learning and human-classification methods can help shed light on cultural traits, using gender roles, attitudes towards risk, and trust as examples. Societies with tales portraying men as dominant and women as submissive tend to relegate their women to subordinate positions in their communities, both historically and today. More risk-averse and less entrepreneurial people grew up listening to stories where competitions and challenges are more likely to be harmful than beneficial. Communities with low tolerance towards antisocial behavior, captured by the prevalence of tricksters getting punished, are more trusting and prosperous today. These patterns hold across groups, countries, and second- generation immigrants. Overall, the results highlight the significance of folklore in cultural economics, calling for additional applications. |
| Keywords | cultural economics, narratives, historical attitudes, economic decision, social norms |
| URL | https://www.nber.org/system/files/working_papers/w25430/w25430.pdf |
| Tags | Archival Empirical | Evolutionary Finance |
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 |
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 |
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) |
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 |
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 |
Corporate risk culture
| Authors | Pan, Siegel, Wang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We examine the formation and evolution of corporate risk culture, that is, the preferences toward risk and uncertainty shared by a firm's leaders, as well as its effect on corporate policies. We document persistent commonality in risk attitudes inside firms, which arises through the selection of leaders with similar preferences and is rooted in the founders' risk attitudes. Changes in corporate risk culture over time affect corporate investment policies, whereas cross-sectional differences in founders' risk attitudes, that is, firms' initial risk culture, contribute to differences across firms in persistent firm policies, such as research and development intensity. |
| Keywords | Risk preferences, risk attitudes, firm's leader, corporate policies, corporate culture |
| URL | https://doi.org/10.1017/S0022109017000771 |
| Tags | Archival Empirical | Evolutionary Finance | Manager / Firm Behavior |
Nature or nurture: What determines investor behavior?
| Authors | Barnea, Cronqvist, Siegel |
| Journal | Journal of Financial Economics |
| Year | 2010 |
| Type | Published Paper |
| Abstract | Using data on identical and fraternal twins' complete financial portfolios, we decompose the cross-sectional variation in investor behavior. We find that a genetic factor explains about one-third of the variance in stock market participation and asset allocation. Family environment has an effect on the behavior of young individuals, but this effect is not long-lasting and disappears as an individual gains experience. Frequent contact among twins results in similar investment behavior beyond a genetic factor. Twins who grew up in different environments still display similar investment behavior. Our interpretation of a genetic component of the decision to invest in the stock market is that there are innate differences in factors affecting effective stock market participation costs. We attribute the genetic component of asset allocation-the relative amount invested in equities and the portfolio volatility-to genetic variation in risk preferences. |
| Keywords | Portfolio choice, investor heterogeneity, behavioral genetics |
| URL | https://www.sciencedirect.com/science/article/pii/S0304405X10001777 |
| Tags | Archival Empirical | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Social Network Structure |
Does culture affect economic outcomes?
| Authors | Guiso, Sapienza, Zingales |
| Journal | Journal of Economic Perspectives |
| Year | 2006 |
| Type | Published Paper | Literature Review Paper |
| Abstract | Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena. This paper summarizes this approach and its achievements so far, and outlines directions for future research. |
| Keywords | Cultural economics, preferences and beliefs redistribution, economic sociology |
| URL | https://www.aeaweb.org/articles?id=10.1257/jep.20.2.23 |
| Tags | Evolutionary Finance | Financing- and Investment Decisions (Individual) |