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 |
Similarity breeds trust: Political homophily and CEO-board communication
| Authors | Dasgupta, Guo, Ren, Shu |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We find evidence suggesting that similarity of political views between the CEO and independent directors ("political homophily") encourages the CEO to share adverse information with the board. Firms with higher political homophily have lower stock price crash risk, are more likely to divest previously acquired assets with poor announcement returns, and are more likely to recognize losses in asset value. Furthermore, the effect of political homophily is complemented by strong shareholder governance which prevents friendly board from insulating the CEO in the case of ex post negative outcomes. Our identification utilizes the exogenous variation in political beliefs associated with the entry of a conservative television network in local markets. Our findings show that a friendly board facilitates CEO-board communication which is crucial for the board to function effectively in its advisory role. |
| Keywords | Friendly board, CEO-board communication, political homophily, crash risk, corporate governance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3966173&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Social Network Structure |
Social networks and market reactions to earnings news
| Authors | Hirshleifer, Peng, Wang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using social network data from Facebook, we show that earnings announcements made by firms located in counties with higher investor social network centrality attract more attention from both retail and institutional investors. For such firms, the immediate price and volume reactions to earnings announcements are stronger, and post-announcement drift is weaker. Such firms have lower post-announcement persistence of return volatility but higher persistence in investor attention and trading volume. These effects are stronger for small firms, firms with poor analyst and media coverage, and for stocks with salient returns. Our evidence suggests a dual role of social networks-they facilitate the incorporation of public information into prices, but also trigger persistent excessive trading. |
| Keywords | Social networks, investor attention, earnings announcement, information diffusion, disagreement |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3824022 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
The rise of Reddit: how social media affects retail investors and short-sellersâ roles in price discovery
| Authors | Hu, Jones, Zhang, Zhang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using 2020-2021 data from social media platform Reddit, we examine connections among stock prices, retail trading, short-selling and social media activity. Higher Reddit traffic, more positive tone, and higher Reddit connectedness predict higher returns, greater and more positive retail order flow, and lower shorting flows the next day. Social media information content is distinct from retail order and shorting information content. Higher Reddit traffic, more positive tone, more disagreement and higher Reddit connectedness increase shorting flowâs information content. Robinhood 50 stocks are more affected by social media activity, with stronger links among retail order flow, shorting flows and future returns. |
| Keywords | social media, short selling, intraday trading, retail investors |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3807655&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
The salience of entrepreneurship: Evidence from online business
| Authors | Huang, Lin, Liu, Manso |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We study the psychological bias underlying the decision to become an entrepreneur in the online business context. Using entrepreneurs affiliated with Taobao Marketplace, the worldâÂÂs largest online shopping platform, as our sample, we find that people who observe the emergence of successful stores in their neighborhood are more likely to become online entrepreneurs. Relying on the Taobao store rating system and detailed geographical information for identification, we find that in rural areas of China, an increase in the online rating (upgrade event) of a store leads to a significant increase in the number of new stores within a 0.5-km radius. This effect increases with the magnitude of the upgrade event, decreases with physical distance from the focal store and is robust to a wide range of rigorous model specifications. However, such decisions to enter the market may be suboptimal, as entrants whose entrepreneurs are motivated by these upgrade events underperform relative to their peers in terms of sales and have a higher probability of market exit. Overall, our results are most consistent with salience theories of choice and cannot be explained by regional development or rational learning. |
| Keywords | Entrepreneurship, peer effect, salience theory, availability heuristic |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3843524 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Social proximity to capital: Implications for investors and firms
| Authors | Kuchler, Li, Peng, Stroebel, Zhou |
| Journal | Review of Financial Studies |
| Year | 2021 |
| Type | Published Paper |
| Abstract | We show that institutional investors are more likely to invest in firms from regions to which they have stronger social ties but find no evidence that these investments earn a differential return. Firms in regions with stronger social ties to locations with many institutional investors have higher valuations and liquidity. These effects are largest for small firms with little analyst coverage, suggesting that the investors' behavior is explained by their increased awareness of firms in socially proximate locations. Our results highlight that the social structure of regions affects firms' access to capital and contributes to geographic differences in economic outcomes. |
| Keywords | Social networks, Social Connectedness Index, institutional investors |
| URL | https://doi.org/10.1093/rfs/hhab111 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Investment Decisions (Institutional) | Social Network Structure |
CEO social media presence and insider trading
| Authors | Li, Liang, Tang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Prior research finds that online social media usage may lower self-control and encourage indulgent behavior in laboratory subjects. We find that corporate CEOs show similar tendencies: CEOs with online social media presence are more likely to succumb to lower self-control and abuse their information advantage to profit from unethical insider trades. Specifically, CEOs' social media presence strongly predicts their insider trading activity in terms of incidence, intensity (amount and frequency), and profitability. We further find that the effect is driven by insider buys (not by sells) and is more pronounced for opportunistic buys which tend to contain more material non-public information. |
| Keywords | Insider trading, social media, CEO misconduct, business ethics |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3909886&dgcid=ejournal_htmlemail_behavioral:experimental:finance:(editor%27s:choice):ejournal_abstractlink |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Manager / Firm Behavior | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Game stops not yet. Investors' behavior in the post-pandemic times
| Authors | Milovidov |
| Year | 2021 |
| Type | Working Paper | Literature Review Paper |
| Abstract | The first twenty years of the 21st century were a period of transformation and change in the development models of the financial market. One of the strongest in the history world financial crises of 2007-2008 ended the post-deregulation model. Transition to the new financial market model turned out to be largely unpredictable, complex, and spontaneous, unlike the previous periods, without the purposeful participation of state regulators. An objective but random reason for this course of events was the COVID-19 pandemic. Pandemic has distorted the effect of the loose monetary policy, which caused building the grounds for a new financial market model. The post-pandemic model of the financial market is still in the early stages of formation, and it is too early to talk about all its properties and elements. However, as seen from current events and processes, the essential factor of the new financial market model formation is a gamification of investors' behavior. The author believes this behavioral model requires much more attention of researches than that in nowadays scientific literature. |
| Keywords | Financial market, investors' behavior, household finance, monetary policy, personal savings, post-pandemic, emotional communities, wallstreetbets, attention-induced trading, gamification |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3905795 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Social Network Structure |
Game on: Social networks and markets
| Authors | Pedersen |
| Year | 2021 |
| Type | Working Paper |
| Abstract | I present closed-form solutions for prices, portfolios, and beliefs in a model where four types of investors trade assets over time: naive investors who learn via a social network, "fanatics" possibly spreading fake news, rational short-term investors, and long-term investors. I show that fanatic and rational views dominate over time due to echo-chamber effects, and their relative importance depends on their following by influencers. Securities markets exhibit social network spillovers, large effects of influencers and thought leaders, bubbles, bursts of high volume, price momentum, fundamental momentum, and reversal. The model sheds new light on the GameStop event, historical bubbles, and asset markets more generally. |
| Keywords | Echo chambers, networks, influencers, fake news, social media, bubbles, asset prices, belief formation |
| URL | http://dx.doi.org/10.2139/ssrn.3794616 |
| Tags | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Theory |
Social ties and peer effects in crowdfunding markets
| Authors | Peng, Zhang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | We identify the crucial role social networks play in crowdfunding markets. Investors are 50% more likely to fund projects that their social network peers support and are 11.2% more likely to fund projects from regions to which they have strong social ties, given a one standard deviation change in the variables. Peer effects complement platform design choices and the effect of social ties, and social ties transmit information about economic conditions in project locations. Further, the investor-level effects aggregate and affect project funding successes. Our findings suggest that social networks increase investor awareness, disseminate information, and have real impacts on capital allocations. |
| Keywords | Social network, peer effects, social learning, fintech, crowdfunding, platform design |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3747375 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Social Network Structure |
Partisan return gap: The polarized stock market in the time of a pandemic
| Authors | Sheng, Sun, Wang |
| Year | 2021 |
| Type | Working Paper |
| Abstract | Using two proxies for investors' political affiliation, we document sharp differences in stock returns between firms likely dominated by Democratic investors (blue stocks) and those dominated by Republican investors (red stocks) during the COVID pandemic. Red stocks have 20 basis points higher risk-adjusted returns than blue stocks on COVID news days (Partisan Return Gap). Lockdown policies, COVID cases, industry and firm fundamentals only explain at most 25% of the return gap. Polarized political beliefs about COVID, revealed through people's social distancing behaviors and their Stock-Twits, contribute to about 40% of the return gap beyond the fundamental channel. Our paper provides partisanship as a novel aspect in understanding abnormal stock returns during the pandemic. |
| Keywords | Partisanship, stock returns, pandemic, COVID-19, political polarization, political finance, social finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3809575 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Social Network Structure |
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 |
Peer effects in networks: A survey
| Authors | Bramoulle, Djebbari, Fortin |
| Journal | Annual Review of Economics |
| Year | 2020 |
| Type | Published Paper | Literature Review Paper |
| Abstract | We survey the recent, fast-growing literature on peer effects in networks. An important recurring theme is that the causal identification of peer effects depends on the structure of the network itself. In the absence of correlated effects, the reflection problem is generally solved by network interactions even in nonlinear, heterogeneous models. By contrast, microfoundations are generally not identified.We discuss and assess the various approaches developed by economists to account for correlated effects and network endogeneity in particular. We classify these approaches in four broad categories: random peers, random shocks, structural endogeneity, and panel data. We review an emerging literature relaxing the assumption that the network is perfectly known. Throughout, we provide a critical reading of the existing literature and identify important gaps and directions for future research. |
| Keywords | Social networks, peer effects, identification, causal effects, randomization, measurement errors |
| URL | https://www.annualreviews.org/doi/pdf/10.1146/annurev-economics-020320-033926 |
| Tags | 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 |
Networks: an economic perspective
| Authors | Jackson, Rogers, Zenou |
| Book | Oxford Handbook of Social Network Analysis |
| Year | 2020 |
| Type | Book | Literature Review Paper |
| Abstract | We discuss social network analysis from the perspective of economics. We organize the presentation around the theme of externalities: the effects that one's behavior has on others' welfare. Externalities underlie the interdependencies that make networks interesting to social scientists. We discuss network formation, as well as interactions between peoples' behaviors within a given network, and the implications in a variety of settings. Finally, we highlight some empirical challenges inherent in the statistical analysis of network-based data. |
| Keywords | economic networks, externalities, game theory, network formation, network games, networks, peer effects, social networks |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827341 |
| Tags | Archival Empirical | Social Network Structure |
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 |
Using gossips to spread information: Theory and evidence from two randomized controlled trials
| Authors | Banerjee, Chandrasekhar, Duflo, Jackson |
| Journal | Review of Economic Studies |
| Year | 2019 |
| Type | Published Paper |
| Abstract | Can we identify highly central individuals in a network without collecting network data, simply by asking community members? Can seeding information via such nominated individuals lead to significantly wider diffusion than via randomly chosen people, or even respected ones? In two separate large field experiments in India, we answer both questions in the affirmative. In particular, in 521 villages in Haryana, we provided information on monthly immunization camps to either randomly selected individuals (in some villages) or to individuals nominated by villagers as people who would be good at transmitting information (in other villages). We find that the number of children vaccinated every month is 22% higher in villages in which nominees received the information. We show that people's knowledge of who are highly central individuals and good seeds can be explained by a model in which community members simply track how often they hear gossip about others. Indeed, we find in a third data set that nominated seeds are central in a network sense, and are not just those with many friends or in powerful positions. |
| Keywords | Centrality, gossip, networks, diffusion, influence, social learning |
| URL | https://doi.org/10.1093/restud/rdz008 |
| Tags | Experimental / Survey-Based Empirical | 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 |