Understanding mechanisms underlying peer effects: evidence from a field experiment on financial decisions

Bursztyn, Leonardo, Ederer, Florian, Ferman, Bruno and Yuchtman, Noam (2014) Understanding mechanisms underlying peer effects: evidence from a field experiment on financial decisions. Econometrica, 82 (4). 1273 - 1301. ISSN 0012-9682

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Abstract

Using a high‐stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice (“social learning”) and because his possession of the asset directly affects others' utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (i) receives no information about the first member, or (ii) is informed of the first member's desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that both social learning and social utility channels have statistically and economically significant effects on investment decisions. Evidence from a follow‐up survey reveals that social learning effects are greatest when the first (second) investor is financially sophisticated (financially unsophisticated); investors report updating their beliefs about asset quality after learning about their peer's revealed preference; and, they report motivations consistent with “keeping up with the Joneses” when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions.

Item Type:	Article
Official URL:	https://onlinelibrary.wiley.com/journal/14680262
Additional Information:	© 2014 The Econometric Society
Divisions:	Management
Subjects:	H Social Sciences > HG Finance
JEL classification:	C - Mathematical and Quantitative Methods > C9 - Design of Experiments > C93 - Field Experiments D - Microeconomics > D0 - General D - Microeconomics > D1 - Household Behavior and Family Economics > D14 - Personal Finance D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D83 - Search; Learning; Information and Knowledge; Communication; Belief G - Financial Economics > G0 - General M - Business Administration and Business Economics; Marketing; Accounting > M3 - Marketing and Advertising > M31 - Marketing
Date Deposited:	04 Jan 2019 14:58
Last Modified:	14 Apr 2024 18:18
URI:	http://eprints.lse.ac.uk/id/eprint/91509

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