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Thought and Behavior Contagion in Capital Markets

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  • Hirshleifer, David
  • Teoh, Siew Hong

Abstract

Prevailing models of capital markets capture a limited form of social influence and information transmission, in which the beliefs and behavior of an investor affects others only through market price, information transmission and processing is simple (without thoughts and feelings), and there is no localization in the influence of an investor on others. In reality, individuals often process verbal arguments obtained in conversation or from media presentations, and observe the behavior of others. We review here evidence concerning how these activities cause beliefs and behaviors to spread, affect financial decisions, and affect market prices; and theoretical models of social influence and its effects on capital markets. Social influence is central to how information and investor sentiment are transmitted, so thought and behavior contagion should be incorporated into the theory of capital markets.

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  • Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9142, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:9142
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    More about this item

    Keywords

    capital markets; thought contagion; behavioral contagion; herd behavior; information cascades; social learning; investor psychology; accounting regulation; disclosure policy; behavioral finance; market efficiency; popular models; memes;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification
    • G0 - Financial Economics - - General
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation

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