Social Contagion and the Survival of Diverse Investment Styles

72 Pages Posted: 23 Feb 2022 Last revised: 27 Jul 2023

See all articles by David A. Hirshleifer

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering

Ruixun Zhang

Peking University; MIT Laboratory for Financial Engineering

Date Written: September 7, 2021

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

JEL Classification: G40, G11, G12, G23

Suggested Citation

Hirshleifer, David A. and Lo, Andrew W. and Zhang, Ruixun, Social Contagion and the Survival of Diverse Investment Styles (September 7, 2021). Available at SSRN: https://ssrn.com/abstract=4032958 or http://dx.doi.org/10.2139/ssrn.4032958

David A. Hirshleifer

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Andrew W. Lo

Massachusetts Institute of Technology (MIT) - Laboratory for Financial Engineering ( email )

100 Main Street
E62-618
Cambridge, MA 02142
United States
617-253-0920 (Phone)
781 891-9783 (Fax)

HOME PAGE: http://web.mit.edu/alo/www

Ruixun Zhang (Contact Author)

Peking University ( email )

5 Yiheyuan Road
Haidian District
Beijing, Beijing 100871
China

MIT Laboratory for Financial Engineering ( email )

100 Main Street
E62-611
Cambridge, MA 02142

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