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Reply To Discussion Post:
Learning from Coworkers: Peer Effects on Individual
Investment Decisions
Introduction
Peer effects on individual investments look at the ways in
which the financial decisions people make are affected by what their peers do.
The research is of paramount importance to the functioning of employee stock
purchase plans (ESPPs) and the more general impact of social networks on
investments. You can get a good deal of input from your friends and family.
i.e., someone’s social network buys into a certain stock or asset so that may
lead them to do the same, even if it’s not the most ideal thing for their own
budget. Observing the impact of peer influences on people’s investment
decisions is also how we learn about the social learning and herding behaviors
of financial markets. In this short, we will be looking at some recent findings
and areas of future research.
Current Trends
Several themes from the peer effects in investment research
have been recently brought to the fore by recent studies. The employees in turn
get a lot of influence by the ESPP participation and trading behavior of their
co-workers, Ouimet and Tate (2020). This social learning phenomenon is most
intense in informationally and demographically comparable employees. Bursztyn
et al. (2014) used a field experiment and discovered that social learning and
social utility strongly influence investing – helping to explain how herding
behavior occurs in markets. Likewise, Barber and Odean (2013) noted that retail
investors make poor investment decisions and suggested the possibility of
work-place networks improving financial decisions through peer influence.
Nguyen et al. (2016) looked at mutual fund flows and found that investors
replicate the investment decisions of others in the same group (herding). Liu
et al. (2017) also investigated peer effects on stock market trading, and
concluded that peer effects can increase the number of stocks traded and
volatility. All of these researches together reinforce how powerful peer
effects are for influencing investment decision making and the significance of
understanding peer effects in various financial environments.
Future Research
There are several promising areas where research could be
taken next. An example is to look at how well targeted investor education
counters the harm of peer influence. In addition to offering tailored training,
researchers could monitor whether such interventions enabled people to make
better, more self-directed investments. An alternative subject for research is
the impact of digital platforms and FinTech on driving or amplifying peer
effects on investment choice. The more technology comes into financial services,
the more important it is to know how it impacts peer behavior. Second,
exploring peer effects in different cultures and organizations might give us
clues about how far the present findings can be generalized. There could be
differences between individuals’ responses to peer effects that depend on
culture and organization, and these differences can help us understand how peer
effects are exhibited around the world. Last but not least, studying long-term
consequences of peer influence on wealth and retirement is an important future
research priority. Social networks influence investment behavior through
information, peer effect and market sentiment. You can always look to them for
some help and advice, but investors need to take what they hear with a grain of
salt and decide on what is right for them according to their own financial
objectives and level of risk. It is possible to know the role of peer effects
in maintaining people’s financial health over time to design strategies to
facilitate sustainable, positive investment behavior.
References
Barber, B. M., & Odean, T. (2013). The behavior of
individual investors. Handbook of the Economics of Finance, 1, 153-235.
https://doi.org/10.1016/B978-0-44-453594-8.00022-6Links to an external site.
Bursztyn, L., Ederer, F., Ferman, B., & Yuchtman, N.
(2014). Understanding Peer Effects in Financial Decisions: Evidence from a
Field Experiment. Econometrica, 82(4), 1273-1301.
https://doi.org/10.3982/ECTA11991Links to an external site.
Liu, Y., Wang, J., & Zhang, L. (2017). Peer effects on
stock trading: Evidence from a natural experiment. Journal of Financial
Economics, 125(3), 387-413. https://doi.org/10.1016/j.jfineco.2017.05.002Links
to an external site.
Nguyen, T., Pham, H., & Nguyen, P. (2016). Herd behavior
in mutual fund flows: Evidence from Vietnamese stock market. Journal of
Behavioral Finance, 17(2), 141-148.
https://doi.org/10.1080/15427560.2016.1150404Links to an external site.
Ouimet, P., & Tate, G. (2020). Learning from Coworkers:
Peer Effects on Individual Investment Decisions. The Journal of Finance, 75(1),
133–172. http://www.jstor.org/stable/45277789Links to an external site.