When we''re investing, we don''t mindlessly copy our peers, according to new research by Luc Arrondel, Hector Calvo Pardo, Chryssi Giannitsarou and Michael Haliassos, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017. Instead, we are more likely to participate in the stock market if we believe that our immediate social circle is more informed about it.
The authors surveyed a sample of French households in 2014 and 2015 to capture measures of stock market participation and social connectedness, but also beliefs and perceptions of stock market returns. They wanted to find out whether those households invested by mindless copying, leading to bubbles and fads, or by processing information and trying to copy good practice.
The results show that people who perceive a higher share of their financial circle as being informed about the stock market or participating in it are more likely to participate themselves. The conditional portfolio share invested in stocks is influenced by social interactions only to the extent that the latter influence perceptions of past stock market performance and, through them, stock market expectations. There is a trace of mindless copying of behaviour, but only in the decision of whether to participate at all.
The researchers conclude ''All in all, our findings suggest that social interactions tend to reduce rather than exacerbate financial literacy limitations, and to affect financial decision-making by being informative rather than “contagious”.''
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Recent research has shown that individuals are more likely to undertake financial risk when more of the people with whom they interact do so. Is this mindless copying or processing of information from knowledgeable peers?
The former can lead to fads, bubbles, and crises, such as the internet bubble or the recent financial crisis. The latter can mitigate crises by communicating financial best practices.
This project develops and analyses new data to shed light on this question. The authors find that people with a greater perceived share of informed peers tend to form a financial circle and to be influenced by that (rather than by the remainder of their social circle) in forming perceptions about the past, expectations about the future, or their degree of exposure to stockholding risk given that they decide to take the plunge. But peers influence the decision to become a stockholder directly, as well as through expectations.
While the thrust of the findings points to informative social interactions, there is a trace of mindless imitation in the participation decision, as it is influenced even by perceived participation in the outer social circle.
The research project develops and analyses new survey data on a representative sample of French households in 2014 and 2015. Data were gathered with an innovative survey that provided measures of stock market participation and social connectedness, but also elicited beliefs and perceptions of stock market returns using probabilistic elicitation techniques.
The researchers distinguish two ways in which social interactions may affect investment decisions: through information exchanged; and through imitation of peers, reflecting social norms in preferences and opinions.
Imitation of peers in the financial circle, whose influence grows with the share of peers perceived to be informed or participating in the stock market, can be thought of as mindful imitation. Being influenced by the participating share of peers outside the financial circle suggests mindless imitation.
Informative social interactions are consistent with the finding that respondents are more likely to form a circle to discuss financial matters when they perceive a larger share of peers in the social circle as informed about the stock market. Having a financial circle that the respondent perceives either as better informed about the stock market or with greater participation in stocks is associated both with higher perceived past stock market returns and greater expectations about the future.
These relationships are not observed for perceived characteristics of the outer social circle, suggesting that they are unlikely to arise from similarity between respondents and peers along unobserved dimensions.
This conclusion is further strengthened by placebo analysis, in which perceptions of the financial and social circle are randomly reassigned to respondents within particular age/education groups and turn out to be insignificant.
Peers influence stock market participation, beyond their influence on perceptions of the past (and thus on expectations of the future). Respondents who perceive a higher share of their financial circle as being informed about the stock market are more likely to participate in it, for given stock market expectations and regardless of how they perceive their outer social circle. Participation in the outer circle is also significant, however, providing traces of mindless imitation in stock market participation.
By contrast, the portfolio share invested in stocks, conditional on participation, is influenced by peers only through expectations. Thus, the case for informative social interactions is cleaner for the degree of exposure to stockholding risk among stock market participants than it is for whether such risk will be undertaken at all.
All in all, these findings suggest that social interactions tend to reduce rather than exacerbate financial literacy limitations, and to affect financial decision-making by being informative rather than ''contagious''.
INFORMATIVE SOCIAL INTERACTIONS – Luc Arrondel (PSE), Hector Calvo Pardo (University of Southampton), Chryssi Giannitsarou (University of Cambridge) and Michael Haliassos (Goethe University Frankfurt)
The authors gratefully acknowledge financial support to collect and analyse the data from the CEPREMAP Foundation (PSE), the Authorité pour les Marches Financiers (AMF), the Keynes Fund, the Cambridge Endowment for Research in Finance (CERF) and the German Research Foundation (DFG).
