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Personal/Social Drivers of Individual Investor Asset Allocation

Posted in Animal Spirits, Individual Investing

How strong is investor herding with respect to friends, family and co-workers? In their June 2014 paper entitled “Peer Effects, Personal Characteristics and Asset Allocation”, Annie Zhang, Ben Jacobsen and Ben Marshall examine the roles of personal characteristics (age, gender, wealth and tax rate), peer influence (household, neighbors and coworkers), and financial advice in individual investor asset class allocations and switching decisions. Their data are for individual holders of KiwiSaver accounts in New Zealand (similar to U.S. 401(k) accounts). Asset classes available to KiwiSavers via funds include cash, bonds, equity and real estate. Using KiwiSaver account data for over 40,000 individual investors spanning 28,000 households, 450 neighborhoods and 14,000 employers during July 2007 through June 2011, they find that:

  • Among the top influencers in terms of explaining the variation in asset class allocations:
    • Household influence explains 15.5%.
    • Personal characteristics explain 9.7%.
    • Co-worker influence explains 5.1%.
    • Neighborhood influence is detectable but marginal.
  • The 7,000 individuals who receive financial advice tend to allocate significantly more to the equity class.
  • All effects combined explain 26.8% of the variation  in asset class allocation.
  • Household member and co-worker fund switching relates positively to investor fund switching behavior, the former much more strongly.

In summary, evidence indicates that close peers substantially affect the asset class allocation decisions of individual investors.

Investors may want to consider whether this social influence aligns with empirical research in their own allocation decisions.

Cautions regarding findings include:

  • The study does not investigate how peer effects relate to investment performance. It is possible that the most influential household members and co-workers are also the best informed about investing.
  • Different cultures may exhibit different levels of social influence.
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