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Social contagion and the survival of diverse investment styles

David Hirshleifer, Andrew W. Lo and Ruixun Zhang

Journal of Economic Dynamics and Control, 2023, vol. 154, issue C

Abstract: We examine the contagion of investment ideas in a multiperiod setting in which investors are more likely to transmit their ideas to other investors after experiencing higher payoffs in one of two investment styles with different return distributions. We show that heterogeneous investment styles are able to coexist in the long run, implying a greater diversity than predicted by traditional theory. We characterize the survival and popularity of styles in relation to the distribution of security returns. In addition, we demonstrate that psychological effects such as conformist preference can lead to oscillations and bubbles in the choice of style. These results remain robust under a wide class of replication rules and endogenous returns. They offer empirically testable predictions, and provide new insights into the persistence of the wide range of investment strategies used by individual investors, hedge funds, and other professional portfolio managers.

Keywords: Contagion; Investment styles; Investor behavior; Investor psychology; Adaptive markets (search for similar items in EconPapers)
JEL-codes: G11 G12 G23 G40 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:154:y:2023:i:c:s0165188923001173

DOI: 10.1016/j.jedc.2023.104711

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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