Active Trading and (Poor) Performance : The Social Transmission Channel
Individuals often invest actively and generate inferior returns. Social interactions might exacerbate this tendency, but the causal effect from peer effects on active trading are difficult to identify empirically. This paper exploits the exogenous...
| Main Authors: | , |
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| Format: | Working Paper |
| Language: | English |
| Published: |
World Bank, Washington, DC
2019
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/901281551966282262/Active-Trading-and-Poor-Performance-The-Social-Transmission-Channel http://hdl.handle.net/10986/31361 |
| Summary: | Individuals often invest actively and
generate inferior returns. Social interactions might
exacerbate this tendency, but the causal effect from peer
effects on active trading are difficult to identify
empirically. This paper exploits the exogenous assignment of
students to classrooms in a large-scale financial education
initiative to evaluate the transmission of trading
strategies among individual investors. The paper shows that
favorable peer returns on single-stock transactions
stimulate market entry among inexperienced investors, even
when total portfolio performance among peers is negative.
The results are consistent with selective communication:
individuals with trading background share their most
favorable trades, which attracts others to the stock market.
Inexperienced individuals who are exposed to peers with
large returns on single trades appear to overestimate the
value of active trading. The paper finds that these rookie
investors make more stock transactions, trade more
speculatively, but also generate inferior returns. The
findings show the strength of social communication as a key
determinant of financial decision making. |
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