Peer effects in multi-layer networks: evidence from financial behavior
| Authors | Balakina, Stockler |
| Year | 2025 |
| Type | Working Paper |
| Abstract | We examine the simultaneous peer effects of co-workers, family, and neighbors in financial behavior using Danish registry data. We find that neighbors exert the strongest influence, followed by co-workers and family members. Peer effects are stronger for stocks than for mutual funds, and among experienced investors. While co-workers primarily influence buying decisions, neighbors affect both buying and selling, suggesting distinct channels of influence across peer groups. A multi-layer network model formalizes our empirical results, showing that an investor’s trading activity depends on her centrality within and across network layers. Our findings provide new insights into the drivers and implications of peer effects in financial markets. |
| Keywords | Stock trading, peer effect, social networks, homophily, household finance |
| URL | https://ssrn.com/abstract=4058371 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
Personal financial advice and portfolio quality
| Authors | Balakina, Bäckman, Hackethal, Hanspal, Lammer |
| Year | 2024 |
| Type | Working Paper |
| Abstract | We document widespread use of personal financial advice among retail investors. Individuals seek competent and trusted sources for financial advice among their family and friends. Investors who provide advice to family and friends are positively selected and emphasize the reputational costs of giving risky financial advice. While previous studies have shown that advice shared on social media promotes active trading, we show that personal financial advice encourages investing in funds over single stocks. Our evidence complements the existing literature on financial advice in online social networks by highlighting differences in incentives and outcomes of advice to close personal connections. |
| Keywords | Social finance, portfolio choice, investment behavior, peer effects |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4150243 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
Beyond connectivity: stock market participation in a network
| Authors | Balakina, Bäckman, Parakhoniak |
| Year | 2024 |
| Type | Working Paper |
| Abstract | What are the aggregate and distributional consequences of the relationship between an individual’s social network and financial decisions? Motivated by several well-documented facts about the influence of social connections on financial decisions, we build and calibrate a model of stock market participation with a social network that emphasizes the interplay between connectivity and network structure. Since connections to informed agents help spreading information, there is a pivotal role for homophily. An increase in the average number of connections raises the average participation rate, mostly due to richer agents. Higher homophily benefits richer agents by creating clusters where information spreads more efficiently. We show empirical evidence consistent with the importance of connectivity and sorting. We discuss several new avenues for future research into the aggregate impact of peer effects in finance. |
| Keywords | Social networks, peer effects, stock market participation, connectivity, homophily |
| URL | https://ssrn.com/abstract=4763145 |
| Tags | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
Visibility bias in the transmission of consumption beliefs and undersaving
| Authors | Han, Hirshleifer, Walden |
| Journal | Journal of Finance |
| Year | 2023 |
| Type | Published Paper |
| Abstract | We model visibility bias in the social transmission of consumption behavior. When consumption is more salient than nonconsumption, 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 thatdisclosure 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 bi-ases, and demographic structure, and provides new insight into savings rates. These predictions are distinct from other common models of consumption distortions. |
| URL | https://onlinelibrary.wiley.com/doi/10.1111/jofi.13223 |
| Tags | Archival Empirical | Consumer Decisions | Social Transmission Biases |
Meet the press: survey evidence on financial journalists as information intermediaries
| Authors | Call, Emett, Maksymov, Sharp |
| Journal | Journal of Accounting and Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We survey 462 financial journalists and conduct 18 interviews to obtain insights on the inputs to their reporting, the incentives they face, and the factors that influence their coverage decisions. We report many findings relevant to the accounting literature and identify multiple avenues for future research. For example, financial journalists say the likelihood they write about a specific company or CEO increases when the company is controversial or the CEO has a colorful personality, suggesting journalists gravitate toward provocative topics. We also find that financial journalists routinely use company-issued disclosures and private phone calls with company management when developing articles, and that they believe they are evaluated primarily on the accuracy, timeliness, and depth of their articles. Journalists also believe monitoring companies to hold them accountable is one of financial journalism's most important objectives, but they often face negative consequences for writing articles that portray companies in an unfavorable light. |
| Keywords | business press, financial journalists, media, information intermediaries, social media, financial analysts |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0165410121000707 |
| Tags | Experimental / Survey-Based Empirical | Media and Textual Analysis | Social Transmission Biases |
Epidemiological expectations
| Authors | Carroll, Wang |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | 'Epidemiological' models of belief formation put social interactions at their core; such models are widely used by scholars who are not economists to study the dynamics of beliefs in populations. We survey the literature in which economists attempting to model the consequences of beliefs about the future -'expectations'- have employed a full-fledged epidemiological approach to explore an economic question. We draw connections to related work on 'contagion,' narrative economics, news/rumor spreading, and the spread of internet memes. A main theme of the paper is that a number of independent developments have recently converged to make epidemiological expectations ('EE') modeling more feasible and appealing than in the past. |
| Keywords | Economic expectations, epidemiological expectations, social interactions, social dynamics, information diffusion, economic narratives |
| URL | https://www.nber.org/papers/w30605?utm_campaign=ntwh&utm_medium=email&utm_source=ntwg4 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Consumer Decisions | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases | Theory |
Listening in on investors' thoughts and conversations
| Authors | Chen, Hwang |
| Journal | Journal of Financial Economics |
| Year | 2022 |
| Type | Published Paper |
| Abstract | A large literature in neuroscience and social psychology shows that humans are wired to be meticulous about how they are perceived by others. In this paper, we propose that impression management considerations can also end up guiding the content that investors transmit via word of mouth and inadvertently lead to the propagation of noise. We analyze server log data from one of the largest investment-related websites in the United States. Consistent with our proposition, we find that investors more frequently share articles that are more suitable for impression management despite such articles less accurately predicting returns. Additional analyses suggest that high levels of sharing can lead to overpricing. |
| Keywords | Social interactions, social transmission bias, asset prices |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21003810?via%3Dihub |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Echo chambers
| Authors | Cookson, Engelberg, Mullins |
| Journal | The Review of Financial Studies |
| Year | 2022 |
| Type | Published Paper |
| Abstract | We find evidence of selective exposure to confirmatory information among 400,000 users on the investor social network StockTwits. Self-described bulls are five times more likely to follow a user with a bullish view of the same stock than are self-described bears. Consequently, bulls see 62 more bullish messages and 24 fewer bearish messages than bears do over the same 50-day period. These âecho chambersâ exist even among professional investors and are strongest for investors who trade on their beliefs. Finally, beliefs formed in echo chambers are associated with lower ex post returns, more siloing of information, and more trading volume. |
| URL | https://academic.oup.com/rfs/article-abstract/36/2/450/6670640 |
| 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 |
Word-of-mouth communication and financial decision making
| Authors | Hwang |
| Year | 2022 |
| Type | Working Paper | Literature Review Paper |
| Abstract | I review the empirical literature on word of mouth (WOM) among investors. I begin with an outline of the empirical challenges that WOM research faces and possible strategies to overcome those challenges. I then discuss recent studies on WOM among retail and institutional investors. The research to date provides compelling evidence that WOM importantly determines investment decisions. On balance, the information transmitted through WOM does not appear to help investors make better investment decisions. I explore possible reasons. I also discuss potential asset pricing implications, the emergence of social technologies, and possible avenues for future research. |
| Keywords | Social asset pricing, social finance, investor psychology, investor behavior, asset prices |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4118285 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
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 |
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 |
Does firm investment respond to peers' investment?
| Authors | Bustamante, Fresard |
| Journal | Management Science |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We study whether, how, and why the investment of a firm depends on the investment of other firms in the same product market. Using an instrumental variable based on the presence of local knowledge externalities, we find a sizeable complementarity of investment among product market peers, holding across a large majority of sectors. Peer effects are stronger in concentrated markets, featuring more heterogeneous firms, and for smaller firms with less precise information. Our findings are consistent with a model in which managers are imperfectly informed about fundamentals and use peers' investments as a source of information. Product market peer effects in investment could amplify shocks in production networks. |
| Keywords | Investment, peer effect, competition, agglomeration economies |
| URL | https://doi.org/10.1287/mnsc.2020.3695 |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Listening in on investors' thoughts and conversations
| Authors | Chen, Hwang |
| Journal | Journal of Financial Economics |
| Year | 2021 |
| Type | Published Paper |
| Abstract | A large literature in neuroscience and social psychology shows that humans are wired to be meticulous about how they are perceived by others. In this paper, we propose that impression management considerations can also end up guiding the content that investors transmit via word of mouth and inadvertently lead to the propagation of noise. We analyze server log data from one of the largest investment-related websites in the United States. Consistent with our proposition, we find that investors more frequently share articles that are more suitable for impression management despite such articles less accurately predicting returns. Additional analyses suggest that high levels of sharing can lead to overpricing. |
| Keywords | Social interactions, Social transmission bias, Asset prices |
| URL | https://www.sciencedirect.com/science/article/abs/pii/S0304405X21003810 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Transmission Biases |
Social transmission bias and investor behavior
| Authors | Han, Hirshleifer, Walden |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We offer a new social approach to investment decision making and asset prices. Investors discuss their strategies and convert others to their strategies with a probability that increases in investment returns. The conversion rate is shown to be convex in realized returns. Unconditionally, active strategies (e.g., high variance and skewness) dominate, although investors have no inherent preference for these characteristics. The model has strong predictions for how the adoption of active strategies depends on investors's social networks. In contrast with nonsocial approaches, sociability, self-enhancing transmission, and other features of the communication process determine the popularity and pricing of active investment strategies. |
| URL | https://doi.org/10.1017/S0022109021000077 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Transmission Biases | Theory |
The neuroscience of persuasion and information propagation: the key role of the mentalizing system
| Authors | Baek, Scholz, Falk |
| Book | Handbook of Communication Science and Biology |
| Year | 2020 |
| Type | Book |
| Abstract | What are the psychological and neural processes that support successful information propagation between communicators and receivers? The current chapter draws upon recent contributions from neuroscience to focus on the role of mentalizing, or considering other people's mental states, as one factor that leads to successful social influence and information propagation. Across different contexts, messages that lead to information propagation are distinguished by higher levels of mentalizing in both communicators and receivers of influence. The chapter also highlights developmental, cultural, and social network factors that moderate the relationship between mentalizing and influence. |
| URL | https://www.taylorfrancis.com/chapters/edit/10.4324/9781351235587-12/neuroscience-persuasion-information-propagation-elisa-baek-christin-scholz-emily-falk |
| Tags | Experimental / Survey-Based Empirical | Social Transmission Biases |
What you see is all there is
| Authors | Enke |
| Journal | Quarterly Journal of Economics |
| Year | 2020 |
| Type | Published Paper |
| Abstract | News reports and communication are inherently constrained by space, time, and attention. As a result, news sources often condition the decision of whether to share a piece of information on the similarity between the signal and the prior belief of the audience, which generates a sample selection problem. This article experimentally studies how people form beliefs in these contexts, in particular the mechanisms behind errors in statistical reasoning. I document that a substantial fraction of experimental participants follows a simple "what you see is all there is" heuristic, according to which participants exclusively consider information that is right in front of them, and directly use the sample mean to estimate the population mean. A series of treatments aimed at identifying mechanisms suggests that for many participants, unobserved signals do not even come to mind. I provide causal evidence that the frequency of such incorrect mental models is a function of the computational complexity of the decision problem. These results point to the context dependence of what comes to mind and the resulting errors in belief updating. |
| Keywords | Bounded rationality, mental models, complexity, beliefs |
| URL | https://doi.org/10.1093/qje/qjaa012 |
| Tags | Experimental / Survey-Based Empirical | Social Transmission Biases |
To be or not to be your authentic self? Catering to others' preferences hinders performance
| Authors | Gino, Sezer, Huanga |
| Journal | Organizational Behavior and Human Decision Processes |
| Year | 2020 |
| Type | Published Paper |
| Abstract | When approaching interpersonal first meetings (e.g., job interviews), people often cater to the target's interests and expectations to make a good impression and secure a positive outcome such as being offered the job (pilot study). This strategy is distinct from other approaches identified in prior impression management research (Studies 1A, 1B and 1C), and does not produce the benefits people expect. In a field study in which entrepreneurs pitched their ideas to potential investors (Study 2), catering harmed investors' evaluations, while being authentic improved them. People experience greater anxiety and instrumentality when they cater to another person's preferences than when they behave authentically (Studies 3A and 3B). Compared to behaving authentically or to a control condition, catering harms performance because trying to anticipate and fulfill others' preferences feels instrumental and increases anxiety (Studies 4 and 5). Taken together, these results suggest that although people believe using catering in interpersonal first meetings will lead to successful outcomes, the opposite is true: catering creates undesirable feelings of instrumentality for the caterer, increases anxiety, and ultimately hinders performance. |
| Keywords | Authenticity, catering, honesty, selection, anxiety, impression management |
| URL | https://doi.org/10.1016/j.obhdp.2020.01.003 |
| Tags | Experimental / Survey-Based Empirical | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases |
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 |
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 |
Biased information transmission in investor social networks: Evidence from professional traders
| Authors | Lim, Lane, Uzzi |
| Journal | Academy of Management Annual Meeting Proceedings |
| Year | 2020 |
| Type | Published Paper |
| Abstract | This research examines how the positive or negative valence of proprietary information affects both the likelihood that people diffuse this information through their social networks and the likelihood that recipients' access to this information provides them with a source of comparative advantage. Using a unique dataset of over 2 million stock trades and associated profits and losses, and 1 million instant messages exchanged between professional day traders at a U.S. hedge fund, we show that day traders are more likely to talk about their gains than their losses with their close contacts, suggesting that positive information is more likely to be shared among one's close network of strong ties. However, by examining the subsequent behaviors of message recipients, we find that recipients tend to discount the value of positive, gains related information, being both more likely to pass on and profit from negative information related to trading losses, particularly from their strong ties. Our results suggest that although individuals are more likely to share positive information with their contacts, message recipients appear to account for the asymmetry in their subsequent communications and decision-making. |
| URL | https://journals.aom.org/doi/10.5465/AMBPP.2020.18198abstract |
| Tags | Archival Empirical | Investment Decisions (Institutional) | Social Transmission Biases |