Working Papers

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.

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.

We model visibility bias in the social transmission of consumption behavior. When consumption is more salient than non-consumption, 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 that disclosure 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 biases, and demographic structure; and provides a novel explanation for the dramatic drop in savings rates in the US and several other countries in recent decades.

This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader's good short-term performance causes them to contact others. A trader's activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders.

We present empirical evidence for the impact of patient reviews on consumers' physician choices. Our study is based on ZocDoc.com - a unique website that integrates patient reviews, and appointment scheduling for physicians on one platform. Using ZocDoc we construct a novel data set consisting of all reviews written for primary care physicians in Manhattan, New York. We then pair these reviews with data on appointments that are booked through ZocDoc, during February-May, 2013. Our data suggest that patient reviews are becoming an important source of reputation for physicians. About 25% of New York primary care physicians are now listed on ZocDoc, and 84% of them have at least 5 reviews. Because ZocDoc displays each physician's rounded average rating to patients, we can use regression discontinuity to identify the causal impact of patient ratings on patient demand. We find that half a star improvement in ratings, on a scale of 1 to 5 stars, leads to a 10% increase in the likelihood, at the mean, that a doctor will fill an appointment.

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.

We review the theory of information cascades and social learning. Our goal is to describe in a relatively integrated and accessible way the more important themes, insights and applications of the literature as it has developed over the last thirty years. We also highlight open questions and promising directions for further theoretical and empirical exploration.

Using health shocks to identify financial distress situations, I document that peer distress leads to a decline in individual leverage and debt on average. This decline occurs as individuals borrow less on the intensive margin, pay higher fractions of their debt and save more following peer distress. The estimates suggest that these peer effects can explain a decline of up to $213.31 billion in household debt between 2011 and 2015, corresponding to 1.82% of total household debt in 2011. The heterogeneity in responses highlight the role of changes in beliefs and preferences as the underlying mechanism.

Around the world, microfinance ties borrowers together using group repayment meetings, shared oaths and often, joint liability. Microfinance institutions (MFIs) have invested heavily in building social capital and generally boast stellar repayment rates. However, recent repayment crises have fueled speculation that peer effects might also reinforce default behavior. I estimate the causal effect of peer repayment on individuals' repayment decisions in the absence of joint liability following a district-level default in which 100% of borrowers temporarily defaulted on their loans and after which borrowers gradually decided whether to repay. Because the defaults occurred simultaneously, the timing of the shock induced variation in repayment incentives both at the individual and peer group levels. Individuals (or peer groups) near the end of their 50-week loan cycles were closest to receiving new loans and had the strongest incentives to repay; those who had recently received disbursements had the weakest. Using the variation in the peer group's incentives to instrument for peer repayment, I find that if a borrower's peers shift from full default to full repayment, she is 10-15pp more likely to repay. Last, I present a dynamic discrete choice model of the repayment decision to estimate the net benefit of the peer mechanism to the MFI. Repayers' positive influence on others (not non-repayers' negative influence) mainly drives the effect. Thus, peer effects actually improve repayment rates relative to a counterfactual without peer effects.

We use data from an in-house call center of a multi-national mobile network operator to study how co-worker productivity affects worker productivity via network effects. We also exploit data from a field experiment to analyze how exogenous changes in worker productivity due to on-the-job training affect co-worker productivity, including non-trained workers. We show that there are strong network effects in co-worker productivity. This effect is driven by conformist behavior. We also show that exposure to trained workers increases the productivity of non-trained workers. This effect works through strategic complementarities (knowledge spillovers). We demonstrate how our network model of worker productivity can be used to inform a variety of practical decisions faced by personnel managers including the design of optimal training policy.

The ESG (environmental, social, and governance) practice has become very important in contemporary business and it is believed to have a significant impact on firm value. However, there still lacks a consensus on the underlying mechanism connecting ESG and firm value. We argue that ESG can impact firm value through two possible channels:investor attention and investor sentiment. Exploiting user-generated content from a popular online investment community (Seeking Alpha) and ESG ratings from a professional database (Sustainalytics), we run a fixed-effect panel regression and find an overall positive relationship between ESG ratings and investor attention but no relationship between ESG ratings and investor sentiment. We then conduct an event-study analysis, in which we classify changes in ESG ratings as upgrade events and downgrade events and find that the significant relationship between ESG and investor attention still holds for the downgrade events but not for the upgrade ones. We conduct various robustness checks, on both ESG and investor attention, to rule out potential effects of other factors, such as firm size, debt, intangible assets, and profitability. Our further mechanism analysis reveals that the effect of ESG ratings on investor attention is driven by the social and governance factors rather than the environmental factors. Our work makes both theoretical and practical contributions by identifying the channel through which ESG affects firm value in the age of social media.