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Active Trading and (Poor) Performance : The Social Transmission Channel

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  • Escobar Pradilla,Laura Manuela
  • Pedraza Morales,Alvaro Enrique

Abstract

Active investors often generate inferior returns. Social interactions might exacerbate this tendency, but the causal link between peer effects and active trading is 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 students assigned to groups where classmates have more trading background, are more likely to start trading after completing the program. These social effects are stronger when peers have experienced favorable outcomes. The paper documents a negative consequence from social interactions: students that registered for courses where peer returns are large, generate lower trading profits than other investors. The evidence is consistent with social learning under biased information -- people share their most successful experiences, encouraging stock trading among uninformed investors. The results shed light on the role of selective communication in the transmission and adoption of ideas, and more importantly, in the behavior of people expose to biased information. The findings show that social learning can lead to misguided decisions when peer choices are not accurately observed by members of the social network.

Suggested Citation

  • Escobar Pradilla,Laura Manuela & Pedraza Morales,Alvaro Enrique, 2019. "Active Trading and (Poor) Performance : The Social Transmission Channel," Policy Research Working Paper Series 8767, The World Bank.
  • Handle: RePEc:wbk:wbrwps:8767
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    File URL: http://documents.worldbank.org/curated/en/901281551966282262/pdf/Active-Trading-and-Poor-Performance-The-Social-Transmission-Channel.pdf
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    Cited by:

    1. Chen, Hailiang & Hwang, Byoung-Hyoun, 2022. "Listening in on investors’ thoughts and conversations," Journal of Financial Economics, Elsevier, vol. 145(2), pages 426-444.
    2. Steiger, Sören & Pelster, Matthias, 2020. "Social interactions and asset pricing bubbles," Journal of Economic Behavior & Organization, Elsevier, vol. 179(C), pages 503-522.
    3. Huang, Shiyang & Hwang, Byoung-Hyoun & Lou, Dong, 2021. "The rate of communication," LSE Research Online Documents on Economics 105870, London School of Economics and Political Science, LSE Library.
    4. Huang, Shiyang & Hwang, Byoung-Hyoun & Lou, Dong, 2021. "The rate of communication," Journal of Financial Economics, Elsevier, vol. 141(2), pages 533-550.

    More about this item

    Keywords

    International Trade and Trade Rules; Educational Sciences; Gender and Development; Financial Literacy; Educational Institutions&Facilities; Effective Schools and Teachers;
    All these keywords.

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