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Did Social Interactions Fuel or Suppress the US Housing Bubble?

Nov. 28, 2017

K. Jeremy Ko, Christo Pirinsky

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We study the implications of social interactions for financial markets in which investors exhibit different degrees of sophistication and can influence each other's beliefs through their interaction. We show that social interactions can either increase or decrease the likelihood for a financial bubble, depending on whether unsophisticated or sophisticated investors have greater social influence. We also present empirical evidence consistent with the theoretical framework from the recent housing bubble. We find that sociability promotes more conservative demand for housing and more stable real estate prices, particularly when the number of sophisticated residents in an area is high.


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