Published Papers

Using the Panel Study of Income Dynamics, we document that controlling for observable characteristics, household investors' likelihood of entering the stock market within the ensuing five years is about 20% to 30% higher if their parents or children had entered the stock market during the previous five years. By eliminating competing hypotheses such as preference similarity and herding, we argue that these findings highlight the significance of information sharing regarding household financial decisions.

What happens in the mind of a person who first hears a potentially exciting idea? We examined the neural precursors of spreading ideas with enthusiasm, and dissected enthusiasm into component processes that can be identified through automated linguistic analysis, gestalt human ratings of combined linguistic and nonverbal cues, and points of convergence/divergence between the two. We combined tools from natural language processing (NLP) with data gathered using fMRI to link the neurocognitive mechanisms that are set in motion during initial exposure to ideas and subsequent behaviors of these message communicators outside of the scanner. Participants' neural activity was recorded as they reviewed ideas for potential television show pilots. Participants' language from video-taped interviews collected post-scan was transcribed and given to an automated linguistic sentiment analysis (SA) classifier, which returned ratings for evaluative language (evaluative vs. descriptive) and valence (positive vs. negative). Separately, human coders rated the enthusiasm with which participants transmitted each idea. More positive sentiment ratings by the automated classifier were associated with activation in neural regions including medial prefrontal cortex; MPFC, precuneus/ posterior cingulate cortex; PC/PCC, and medial temporal lobe; MTL. More evaluative, positive, descriptions were associated exclusively with neural activity in temporal-parietal junction (TPJ). Finally, human ratings indicative of more enthusiastic sentiment were associated with activation across these regions (MPFC, PC/PCC, DMPFC, TPJ, and MTL) as well as in ventral striatum (VS), inferior parietal lobule and premotor cortex. Taken together, these data demonstrate novel links between neural activity during initial idea encoding and the enthusiasm with which the ideas are subsequently delivered. This research lays the groundwork to use machine learning and neuroimaging data to study word of mouth communication and the spread of ideas in both traditional and new media environments.

This paper analyzes the trading behavior of stock market investors. Purchases and sales are highly correlated when we divide investors geographically. Investors who live near a firm's headquarters react in a similar manner to releases of public information. We are able to make this identification by exploiting a unique feature of individual brokerage accounts in the People's Republic of China. The data allow us to pinpoint an investor's location at the time he or she places a trade. Our results are consistent with a simple, rational expectations model of heterogeneously informed investors.

The popular media have publicized the idea that social networking Web sites (e.g., Facebook) may enrich the interpersonal lives of people who struggle to make social connections. The opportunity that such sites provide for self-disclosure-a necessary component in the development of intimacy-could be especially beneficial for people with low self-esteem, who are normally hesitant to self-disclose and who have difficulty maintaining satisfying relationships. We suspected that posting on Facebook would reduce the perceived riskiness of self-disclosure, thus encouraging people with low self-esteem to express themselves more openly. In three studies, we examined whether such individuals see Facebook as a safe and appealing medium for self-disclosure, and whether their actual Facebook posts enabled them to reap social rewards. We found that although people with low self-esteem considered Facebook an appealing venue for self-disclosure, the low positivity and high negativity of their disclosures elicited undesirable responses from other people.

This paper shows that managers are influenced by their social peers when making corporate policy decisions. Using biographical information about executives and directors of U.S. public companies, we define social ties from current and past employment, education, and other activities. We find that more connections two companies share with each other, more similar their capital investments are. To address endogeneity concerns, we find that companies invest less similarly when an individual connecting them dies. The results extend to other corporate finance policies. Furthermore, central companies in the social network invest in a less idiosyncratic way and exhibit better economic performance.

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.

We analyze a sequential decision model in which each decision maker looks at the decisions made by previous decision makers in taking her own decision. This is rational for her because these other decision makers may have some information that is important for her. We then show that the decision rules that are chosen by optimizing individuals will be characterized by herd behavior; i.e., people will be doing what others are doing rather than using their information. We then show that the resulting equilibrium is inefficient.

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.

Behavioral finance studies the application of psychology to finance, with a focus on individual-level cognitive biases. I describe here the sources of judgment and decision biases, how they affect trading and market prices, the role of arbitrage and flows of wealth between more rational and less rational investors, how firms exploit inefficient prices and incite misvaluation, and the effects of managerial judgment biases. There is a need for more theory and testing of the effects of feelings on financial decisions and aggregate outcomes. Especially, the time has come to move beyond behavioral finance to social finance, which studies the structure of social interactions, how financial ideas spread and evolve, and how social processes affect financial outcomes.

We study the relation between households' stock purchases and stock purchases made by their neighbors. A ten percentage point increase in neighbors' purchases of stocks from an industry is associated with a two percentage point increase in households' own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states. Controlling for area sociability, households' and neighbors' investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households' stock purchases and stock purchases made by their neighbors to word-of-mouth communication.

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.

We propose that stock-market participation is influenced by social interaction. In our model, any given "social" investor finds the market more attractive when more of his peers participate. We test this theory using data from the Health and Retirement Study, and find that social households-those who interact with their neighbors, or attend church-are substantially more likely to invest in the market than non-social households, controlling for wealth, race, education, and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher.