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 |
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 |
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 |
Is fraud contagious? Coworker influence on misconduct by financial advisors
| Authors | Dimmock, Gerken, Graham |
| Journal | Journal of Finance |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Using a novel data set of U.S. financial advisors that includes individuals' employment histories and misconduct records, we show that coworkers influence an individual's propensity to commit financial misconduct. We identify coworkers' effect on misconduct using changes in coworkers caused by mergers of financial advisory firms. The tests include merger-firm fixed effects to exploit the variation in changes to coworkers across branches of the same firm. The probability of an advisor committing misconduct increases if his new coworkers, encountered in the merger, have a history of misconduct. This effect is stronger between demographically similar coworkers. |
| URL | https://doi.org/10.1111/jofi.12613 |
| Tags | Archival Empirical | Propagation of Noise / Undesirable Outcomes |
The geography of financial misconduct
| Authors | Parsons, Sulaeman, Titman |
| Journal | Journal of Finance |
| Year | 2018 |
| Type | Published Paper |
| Abstract | Financial misconduct (FM) rates differ widely between major U.S. cities, up to a factor of 3. Although spatial differences in enforcement and firm characteristics do not account for these patterns, city-level norms appear to be very important. For example, FM rates are strongly related to other unethical behavior, involving politicians, doctors, and (potentially unfaithful) spouses, in the city. |
| URL | https://doi.org/10.1111/jofi.12704 |
| Tags | Archival Empirical | Propagation of Noise / Undesirable Outcomes |
The spread of true and false news online
| Authors | Vosoughi, Roy, Aral |
| Journal | Science |
| Year | 2018 |
| Type | Published Paper |
| Abstract | We investigated the differential diffusion of all of the verified true and false news stories distributed on Twitter from 2006 to 2017. The data comprise ~126,000 stories tweeted by ~3 million people more than 4.5 million times. We classified news as true or false using information from six independent fact-checking organizations that exhibited 95 to 98% agreement on the classifications. Falsehood diffused significantly farther, faster, deeper, and more broadly than the truth in all categories of information, and the effects were more pronounced for false political news than for false news about terrorism, natural disasters, science, urban legends, or financial information. We found that false news was more novel than true news, which suggests that people were more likely to share novel information. Whereas false stories inspired fear, disgust, and surprise in replies, true stories inspired anticipation, sadness, joy, and trust. Contrary to conventional wisdom, robots accelerated the spread of true and false news at the same rate, implying that false news spreads more than the truth because humans, not robots, are more likely to spread it. |
| URL | https://doi.org/10.1007/978-981-16-3398-0_15 |
| Tags | Archival Empirical | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
Information networks: Evidence from illegal insider trading tips
| Authors | Ahern |
| Journal | Journal of Financial Economics |
| Year | 2017 |
| Type | Published Paper |
| Abstract | This paper exploits a novel hand-collected data set to provide a comprehensive analysis of the social relationships that underlie illegal insider trading networks. I find that inside information flows through strong social ties based on family, friends, and geographic proximity. On average, inside tips originate from corporate executives and reach buy-side investors after three links in the network. Inside traders earn prodigious returns of 35% over 21 days, with more central traders earning greater returns, as information conveyed through social networks improves price efficiency. More broadly, this paper provides some of the only direct evidence of person-to-person communication among investors. |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X17300570 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes |
Trust busting: The effect of fraud on investor behavior
| Authors | Gurun, Stoffman, Yonker |
| Journal | Review of Financial Studies |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We study the importance of trust in the investment advisory industry by exploiting the geographic dispersion of victims of the Madoff Ponzi scheme. Residents of communities that were exposed to the fraud subsequently withdrew assets from investment advisers and increased deposits at banks. Additionally, exposed advisers were more likely to close. Advisers who provided services that can build trust, such as financial planning advice, experienced fewer withdrawals. Our evidence suggests that the trust shock was transmitted through social networks. Taken together, our results show that trust plays a critical role in the financial intermediation industry. |
| Keywords | Social trust, investor behaviors, investment decisions, social networks, financial intermediaries |
| URL | https://doi.org/10.1093/rfs/hhx058 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
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 |
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 |
Social interaction at work
| Authors | Hvide, Ostberg |
| Journal | Journal of Financial Economics |
| Year | 2015 |
| Type | Published Paper |
| Abstract | Stock market investment decisions of individuals are positively correlated with those of coworkers. Sorting of unobservably similar individuals to the same workplaces is unlikely to explain this pattern, as evidenced by the investment behavior of individuals who move between plants. Purchases made under stronger coworker purchase activity are not associated with higher returns. Moreover, social interaction appears to drive the purchase of within-industry stocks. Overall, we find a strong influence of coworkers on investment choices, but not an influence that improves the quality of investment decisions. |
| Keywords | Individual investors, peer effects, social interaction, investment decisions, stock selection |
| URL | https://doi.org/10.1016/j.jfineco.2015.06.004 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes |
Work environment and individual background: Explaining regional shirking differentials in a large Italian firm
| Authors | Ichino, Maggi |
| Journal | Quarterly Journal of Economics |
| Year | 2000 |
| Type | Published Paper |
| Abstract | The prevalence of shirking within a large Italian bank appears to be characterized by significant regional differentials. In particular, absenteeism and misconduct episodes are substantially more prevalent in the south. We consider a number of potential explanations for this fact: different individual backgrounds; group-interaction effects; sorting of workers across regions; differences in local attributes; different hiring policies; and discrimination against southern workers. Our analysis suggests that individual backgrounds, group-interaction effects, and sorting effects contribute to explaining the north-south shirking differential. None of the other explanations appears to be of first-order importance. |
| URL | https://doi.org/10.1162/003355300554890 |
| Tags | Archival Empirical | Propagation of Noise / Undesirable Outcomes |
The socio-economic dynamics of speculative markets: Interacting agents, chaos, and the fat tails of return distributions
| Authors | Lux |
| Journal | Journal of economic behavior & organization |
| Year | 1998 |
| Type | Published Paper |
| Abstract | This paper develops a model of the social and economic interaction of speculators in a securities or foreign exchange market. Both chartist and fundamentalist strategies are pursued by traders. The formalization of chartists behavior combines elements of mimetic contagion and trend chasing leading to waves of optimism or pessimism. Furthermore, changes of strategies from chartist to fundamentalist behavior and vice versa occur because speculators compare the performance of both strategies. The dynamic system under study encompasses the time development of the distribution of attitudes among traders as well as price adjustment. Chaotic attractors are found within a broad range of parameter values. The distributions of returns derived from chaotic trajectories of the model share important characteristics of empirical data: they exhibit high peaks around the mean as well as fat tails (leptokurtosis) and become less leptokurtotic under time aggregation. |
| Keywords | Herd behavior, bubbles, leptokurtosis |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0167268197000887 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |