Historical anecdotes of new investors being drawn into a booming asset market, only to suffer when the market turns, abound. While the role of investor contagion in asset bubbles has been explored extensively in the theoretical literature, causal empirical evidence on the topic is virtually non-existent. This paper studies the recent boom and bust in the U.S. housing market, and establishes that many novice investors entered the market as a direct result of observing investing activity of multiple forms in their own neighborhoods, and that “infected” investors performed poorly relative to other investors along several dimensions.

Historical accounts of well-known financial boom and bust episodes have drawn attention to several phenomena that appear to signify and contribute to asset bubbles. A common observation is that market participation tends to broaden significantly during a speculative boom, as investors with limited experience or expertise are drawn into the market. In his famous description of the boom and bust in the 1637 Dutch tulip market, for example, Mackay (1841) commented that at its peak, “Nobles, citizens, farmers, mechanics, seamen, footmen, maid-servants, even chimney-sweeps and old clothes women, dabbled in tulips.”1Such a “speculative fever” is widely viewed as symptomatic of bubble-like episodes and financial crises,2and many modern theoretical models of asset bubbles characterize both rational and irrational herd behavior capable of generating exactly the sort of investor contagion described in these historical accounts. These models typically characterize a fundamental information problem in which rational investors use the activity of others to learn about movements in market fundamentals, but also often include a subset of native agents that engage in herd behavior for reasons that may not be entirely motivated by rational decision-making.