Blog - Investing Notes
June 10, 2008 - Peer Pressure and Individual Investing Behavior
Does interaction with peers significantly affect the choices of individual
investors? Are some individuals more susceptible to such pressure than others?
In their April 2008 paper entitled "Susceptibility
to Interpersonal Influence in an Investment Context", A. Hoffmann and Thijs
Broekhuizen investigate how interpersonal influences affect the investment decisions
of individuals and which individuals are most susceptible to such influences.
Combining the results of a laboratory experiment involving 154 university students
and a survey of 287 investors, they conclude that:
- Individuals who lack investing knowledge, perceive investing as a risky
way to enhance status and have strong social need are especially susceptible
to interpersonal influences. Social need is are the strongest indicator of
such susceptibility.
- Interpersonal influences tend to align individual investment decisions
with information/opinions provided by the influencers, even when such alignment
means choosing an investment with low past returns. In other words, individuals
appear to trade off investment returns for social rewards (or avoidance of
social punishments).
- Individuals susceptible to informational interpersonal influences (tending
to accept information from others as credible evidence about reality) trade
infrequently. Individuals susceptible to normative
interpersonal influences (tending to comply with expectations of others to
achieve a sense of belonging or obtain social approval) trade frequently.
- In general, informational interpersonal influences shape individual investing
behaviors more strongly than do normative interpersonal influences.
In summary, individuals should carefully consider whether validated information
or peer pressure is driving their investing/trading behaviors.
For related research, see Blog
Synthesis: Individual Investing.
