Evidence and Effects of Social Referencing Investor Behaviour during Market Bubbles

Market bubbles often occur around the same time that new means of investing become available to enable increased market participation. An important aspect of increased market participation is the possible introduction of new investors who behave differently from existing traditional investors. Preliminary evidence from a new data set constructed from publicly available information suggests that these new investors display social referencing behaviour - their investment decisions are based more on social information (e.g., members of their peer group have purchased a stock) and less on typical financial information (e.g., the price of a stock). During the internet bubble of the late 1990s, our collected data show how investors using newly introduced on-line brokerages may have invested differently than investors using traditional and established brokerages. Using this model, we simulate an influx of these new social referencing investor agents in a proportion that is similar to the market weight that new on-line investors had during the internet bubble. The ability of our model to cause a quantitatively accurate, multi-agent simulation of traditional investors to similarly produce a price bubble demonstrates the potential that multi-agent models can have to produce quantitative results for qualitative investor models.