Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(k) Pension Plan Investors
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We show that participants are influenced by their coworkers when they make equity investment decisions. Using a rich dataset of 401(k) plans, we find that individuals are likely to increase (decrease) their risky share when they have lower (higher) equity exposure than their coworkers in the last period. The effect is especially strong when the difference in equity exposure is substantial. Furthermore, individuals are likely to increase their equity exposure if they earn lower equity returns than their coworkers did in the last period. However, when their returns on equity are higher than their peers’, they tend not to decrease their risky share. The interaction of peer behavior and peer outcome influences investment decisions, inducing individuals with substantially lower equity exposure than their coworkers to increase their risky share when coworkers also earned higher returns. Finally, we find that there exists heterogeneity in short-term excess returns following social interaction.
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All findings, interpretations, and conclusions of this paper represent the views of the authors and not those of the Wharton School or the Pension Research Council. © 2015 Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Date Posted: 12 March 2019