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

Leonardo Bursztyn, Florian Ederer, Bruno Ferman and Noam Yuchtman

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: peer effects; social learning; behavioral finance; field experiment (search for similar items in EconPapers)
JEL-codes: C93 D0 D14 D83 G0 M31 (search for similar items in EconPapers)
Date: 2014-07-21
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (264)

Published in Econometrica, 21, July, 2014, 82(4), pp. 1273 - 1301. ISSN: 0012-9682

Downloads: (external link)
http://eprints.lse.ac.uk/91509/ Open access version. (application/pdf)

Related works:
Journal Article: Understanding Mechanisms Underlying Peer Effects: Evidence From a Field Experiment on Financial Decisions (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:91509

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().