IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/11838.html
   My bibliography  Save this paper

Persuasion in Finance

Author

Listed:
  • Sendhil Mullainathan
  • Andrei Shleifer

Abstract

Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the course of the internet bubble. The evidence on the content of the persuasive messages is broadly consistent with the behavioral model of persuasion.

Suggested Citation

  • Sendhil Mullainathan & Andrei Shleifer, 2005. "Persuasion in Finance," NBER Working Papers 11838, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11838
    Note: AP CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w11838.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Edward L. Glaeser & Giacomo A. M. Ponzetto & Jesse M. Shapiro, 2005. "Strategic Extremism: Why Republicans and Democrats Divide on Religious Values," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1283-1330.
    2. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    3. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    4. De Long, J Bradford, et al, 1990. "Positive Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance, American Finance Association, vol. 45(2), pages 379-395, June.
    5. Gary S. Becker & Kevin M. Murphy, 1993. "A Simple Theory of Advertising as a Good or Bad," The Quarterly Journal of Economics, Oxford University Press, vol. 108(4), pages 941-964.
    6. Stigler, George J., 2011. "Economics of Information," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 5, pages 35-49.
    7. Edward L. Glaeser, 2005. "The Political Economy of Hatred," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 45-86.
    8. Henrik Cronqvist, 2005. "Advertising and Portfolio Choice," CeRP Working Papers 44, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    9. Matthew Gentzkow & Jesse M. Shapiro, 2006. "Media Bias and Reputation," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 280-316, April.
    10. Chevalier, Judith & Ellison, Glenn, 1997. "Risk Taking by Mutual Funds as a Response to Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1167-1200, December.
    11. Xavier Gabaix & David Laibson, 2018. "Shrouded attributes, consumer myopia and information suppression in competitive markets," Chapters, in: Victor J. Tremblay & Elizabeth Schroeder & Carol Horton Tremblay (ed.), Handbook of Behavioral Industrial Organization, chapter 3, pages 40-74, Edward Elgar Publishing.
    12. Erik R. Sirri & Peter Tufano, 1998. "Costly Search and Mutual Fund Flows," Journal of Finance, American Finance Association, vol. 53(5), pages 1589-1622, October.
    13. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    14. Sendhil Mullainathan & Andrei Shleifer, 2005. "The Market for News," American Economic Review, American Economic Association, vol. 95(4), pages 1031-1053, September.
    15. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    16. David Laibson, 2001. "A Cue-Theory of Consumption," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 81-119.
    17. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A Model of Investor Sentiment," Scholarly Articles 30747159, Harvard University Department of Economics.
    18. Nelson, Philip, 1974. "Advertising as Information," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 729-754, July/Aug..
    19. Kevin M. Murphy & Andrei Shleifer, 2004. "Persuasion in Politics," American Economic Review, American Economic Association, vol. 94(2), pages 435-439, May.
    20. Mullainathan, Sendhil & Shleifer, Andrei, 2005. "The Market for News," Scholarly Articles 33078973, Harvard University Department of Economics.
    21. Grossman, S J & Hart, O D, 1980. "Disclosure Laws and Takeover Bids," Journal of Finance, American Finance Association, vol. 35(2), pages 323-334, May.
    22. Matthew Rabin & Joel L. Schrag, 1999. "First Impressions Matter: A Model of Confirmatory Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 37-82.
    23. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
    24. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. "Contrarian Investment, Extrapolation, and Risk," Scholarly Articles 30721347, Harvard University Department of Economics.
    25. Jonathan Reuter & Eric Zitzewitz, 2006. "Do Ads Influence Editors? Advertising and Bias in the Financial Media," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 197-227.
    26. Prem C. Jain & Joanna Shuang Wu, 2000. "Truth in Mutual Fund Advertising: Evidence on Future Performance and Fund Flows," Journal of Finance, American Finance Association, vol. 55(2), pages 937-958, April.
    27. McCloskey, Donald & Klamer, Arjo, 1995. "One Quarter of GDP Is Persuasion," American Economic Review, American Economic Association, vol. 85(2), pages 191-195, May.
    28. Prendergast, Canice, 1993. "A Theory of "Yes Men."," American Economic Review, American Economic Association, vol. 83(4), pages 757-770, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Henrik Cronqvist, 2005. "Advertising and Portfolio Choice," CeRP Working Papers 44, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    2. Hans Gersbach & Volker Hahn, 2011. "Monetary Policy Inclinations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1707-1717, December.
    3. James J. Choi & David Laibson & Brigitte C. Madrian, 2010. "Why Does the Law of One Price Fail? An Experiment on Index Mutual Funds," Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1405-1432, April.
    4. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 577-619.
    5. Hirshleifer, David & Teoh, Siew Hong, 2008. "Thought and Behavior Contagion in Capital Markets," MPRA Paper 9164, University Library of Munich, Germany.
    6. Olsen, Robert A., 2008. "Trust as risk and the foundation of investment value," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 37(6), pages 2189-2200, December.
    7. Gerry Antioch, 2013. "Persuasion is now 30 per cent of US GDP," Economic Roundup, The Treasury, Australian Government, issue 1, pages 1-10, April.
    8. Ante Sterc, 2022. "Limited Consideration in the Investment Fund Choice," CERGE-EI Working Papers wp729, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    9. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago.
    10. Bettina Becker & Silke Uebelmesser, 2010. "Health Insurance Competition in Germany - the Role of Advertising," Schmollers Jahrbuch : Journal of Applied Social Science Studies / Zeitschrift für Wirtschafts- und Sozialwissenschaften, Duncker & Humblot, Berlin, vol. 130(2), pages 169-194.
    11. Arjo Klamer, 2011. "Cultural entrepreneurship," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 24(2), pages 141-156, June.
    12. Riccardo Ferretti & Francesca Pancotto & Enrico Rubaltelli, 2016. "A test of the Behavioral versus the Rational model of Persuasion in Financial Advertising," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 16105, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".
    13. Riccardo Ferretti & Francesca Pancotto & Enrico Rubaltelli, 2016. "A test of the Behavioral versus the Rational model of Persuasion in Financial Advertising," Centro Studi di Banca e Finanza (CEFIN) (Center for Studies in Banking and Finance) 0059, Universita di Modena e Reggio Emilia, Dipartimento di Economia "Marco Biagi".

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Estrada, Fernando, 2010. "Información y persuasión en los mercados financieros [Information and persuasion in financial markets]," MPRA Paper 20158, University Library of Munich, Germany.
    2. Sendhil Mullainathan & Joshua Schwartzstein & Andrei Shleifer, 2008. "Coarse Thinking and Persuasion," The Quarterly Journal of Economics, Oxford University Press, vol. 123(2), pages 577-619.
    3. Fernando ESTRADA, 2010. "Theory Of Argumentation In Financial Markets," Journal of Advanced Studies in Finance, ASERS Publishing, vol. 1(1), pages 18-22.
    4. Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2015. "Money Doctors," Journal of Finance, American Finance Association, vol. 70(1), pages 91-114, February.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 69721, Harvard University OpenScholar.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, "undated". "Money Doctors," Working Paper 228501, Harvard University OpenScholar.
      • Gennaioli, Nicola & Shleifer, Andrei & Vishny, Robert W., 2014. "Money Doctors," Scholarly Articles 12965657, Harvard University Department of Economics.
      • Nicola Gennaioli & Andrei Shleifer & Robert W. Vishny, 2012. "Money Doctors," NBER Working Papers 18174, National Bureau of Economic Research, Inc.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money Doctors," Working Papers 464, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
      • Nicola Gennaioli & Andrei Shleifer & Robert Vishny, 2012. "Money doctors," Economics Working Papers 1355, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Martin Gold, 2010. "Fiduciary Finance," Books, Edward Elgar Publishing, number 13813, Summer.
    6. Daniel, Kent & Hirshleifer, David & Teoh, Siew Hong, 2002. "Investor psychology in capital markets: evidence and policy implications," Journal of Monetary Economics, Elsevier, vol. 49(1), pages 139-209, January.
    7. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    8. Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 1-48.
    9. Kent Daniel & Sheridan Titman, 2006. "Market Reactions to Tangible and Intangible Information," Journal of Finance, American Finance Association, vol. 61(4), pages 1605-1643, August.
    10. Khaled Obaid & Kuntara Pukthuanthong, 2021. "Informativeness of mutual fund advertisements: Does advertising communicate fund quality to investors?," Financial Management, Financial Management Association International, vol. 50(1), pages 203-236, March.
    11. Delavande, Adeline & Zafar, Basit, 2018. "Information and anti-American attitudes," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 1-31.
    12. Glaser, Markus & Nöth, Markus & Weber, Martin, 2003. "Behavioral finance," Papers 03-14, Sonderforschungsbreich 504.
    13. Kaniel, Ron & Starks, Laura T & Gallaher, Steven, 2015. "Advertising and Mutual Funds: From Families to Individual Funds," CEPR Discussion Papers 10329, C.E.P.R. Discussion Papers.
    14. Chan, Wesley S. & Frankel, Richard & Kothari, S.P., 2004. "Testing behavioral finance theories using trends and consistency in financial performance," Journal of Accounting and Economics, Elsevier, vol. 38(1), pages 3-50, December.
    15. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    16. Belleflamme,Paul & Peitz,Martin, 2015. "Industrial Organization," Cambridge Books, Cambridge University Press, number 9781107687899.
    17. Estrada, Fernando, 2011. "Financial crises, asymmetric information and argumentation," MPRA Paper 35080, University Library of Munich, Germany.
    18. Henrik Cronqvist, 2005. "Advertising and Portfolio Choice," CeRP Working Papers 44, Center for Research on Pensions and Welfare Policies, Turin (Italy).
    19. Kliger, Doron & Levy, Ori & Sonsino, Doron, 2003. "On absolute and relative performance and the demand for mutual funds--experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 52(3), pages 341-363, November.
    20. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, June.

    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M3 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Marketing and Advertising

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:11838. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.