Moonshots, Investment Booms, and Selection Bias in the Transmission of Cultural Traits

David Hirshleifer and Joshua Plotkin

No 27735, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Biased information about the payoffs received by others can drive innovation, risk-taking, and investment booms. We study this cultural phenomenon using a model based on two premises. The first is a tendency for large successes, and the actions that lead to them, to be more salient to onlookers than small successes or failures. The second premise is selection neglect—the failure of observers to adjust for biased observation. In our model, each firm in sequence chooses to adopt or to reject a project that has two possible payoffs, one positive and one negative. The probability of success is higher in the high state of the world than in the low state. Each firm observes the payoffs received by past adopters before making its decision, but there is a chance that an adopter's outcome will be censored, especially if the payoff was negative. Failure to account for biased censorship causes firms to become overly optimistic, leading to irrational booms in adoption. Booms may eventually collapse, or may last forever. We describe these effects as a form of cultural evolution with adoption or rejection viewed as traits transmitted between firms. Evolution here is driven not only by differential copying of successful traits, but also by cognitive reasoning about which traits are more likely to succeed—quantified using the Price Equation to decompose the effects of mutation pressure and evolutionary selection. This account provides a new explanation for investment booms, merger and IPO waves, and waves of technological innovation.

JEL-codes: D03 D21 D25 D53 D83 D92 G02 G3 G4 G41 M2 O31 O35 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-evo, nep-mic and nep-sbm
Note: CF PR
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as David Hirshleifer & Joshua B. Plotkin, 2021. "Moonshots, investment booms, and selection bias in the transmission of cultural traits," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 118(26), pages 2015571118-, June.

Downloads: (external link)
http://www.nber.org/papers/w27735.pdf (application/pdf)

Related works:
Journal Article: Moonshots, investment booms, and selection bias in the transmission of cultural traits (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:27735

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w27735

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().