How Does Internet Escalate Investor Bounded Rationality? A Literature Review

Cen Yonghua; Zhang Can; Wu Chengyao; Ma Dandan

doi:doi:10.16538/j.cnki.fem.2018.06.010

Summary

Prior investigations from different disciplines probe into three aspects by following their own diagrams in an isolated way, resulting in obvious gaps and hedges. The empirical research regarding investor bounded rationality sheds substantial light on the measurement, effects, prediction and modeling of two prominent components of bounded rationality, i.e., attention and sentiment. However, the empirical evidence is not effectively consolidated with psychological descriptive frameworks and economic modeling frameworks, and is insufficient in reaching an effective model of asset pricing driven by bounded rationality, and inadequate in picturing the bounded rationality of investors. The literature on media information identifies different effects, such as the effects of category, sentiment, quantity, timing, salience, and co-movement, etc., establishing that media information significantly affects investor decision-making and financial markets, by allocating investor attention and evoking investor sentiments. Internet-channeled media information provides important input data of reality for mining for signals of asset prices, and serves as an important nexus between the decision-making of individual investors and the evolution at the societal level. Concerning behavior contagion, some of the literature empirically reveals the peer effects in financial markets, while the majority of research, enlightened by physical models, attempts to explain the anomalies in financial markets by simulating the contagion and evolution of investor decision and psychology at the system level driven by investor interactions. However, these system-level models always simplify the processes of investor decision-making and interaction, lacking a precise and detailed portray of heterogeneous investors at the individual level and lacking the input of reality data. 　　In response to the above isolations, the current research seeks to review recent literature from the perspectives of media effects and behavioral contagion to obtain insights for understanding how media information and social interaction in Internet age arouse or even escalate the bounded rationality of investors. Particularly, by the scrutinizing, this research appeals to future scholarly efforts to synthesize the reviewed perspectives into a holistic dynamic model in an interdisciplinary way. In the synthesized model, individual decision-making rules can be inferred from the mass of prior empirical and modeling investigations on investor bounded rationality; the momentum of media, the structure of investor interaction network, as well as the dynamic states of investor belief and preference, can be learned from the real-world media information by approaches of text-mining, information extraction and sentiment analysis; and moreover, the market indicators can serve as the feedback of reality. In this synthesizing way, the dynamic emergent effects of the behavioral contagion of investors with bounded rationality and the asset prices can be more effectively and deeply unraveled.