Chapter 9 Social Interaction and Investing

Transcript:Chapter 9 Social Interaction and Investing:
Chapter 9 Social Interaction and Investing Conversation Social economic and finance paradigm Professor Hirshleifer’s 2020 presidential address to the American Finance Association Conversation allows for the rapid exchange of information, opinions, and emotions Ramifications are that the resulting actions can generate price bubbles, herding, and investor sentiment 2 Social People and Investing Interaction makes people more comfortable investing Survey of 7,500 households in Health and Retirement Study of Households found that: Social households are more likely to invest in the stock market This is magnified if the household is in a high stock-market participation community Harrison Hong, Jeffrey D. Kubik, and Jeremy C. Stein, “Social Interaction and Stock-Market Participation,” Journal of Finance 59(2004): 137–163 3 Using both IRS data or stock brokerage data, studies find that… When a neighbor increases purchases in an industry by 10%, the household increases ownership by 2% Neighbor increases ownership in local company, household also increases by the same amount This word-of-mouth information diffusion is stronger in states that are considered to be more social Professional investor neighbors also have similar portfolios Especially when they have the same ethnic background Sharing a culture makes them more likely to socially connect See Zoran Ivkovic and Scott Weisbenner, “Information Diffusion Effects in Individual Investor’s Common Stock Purchases: Covet They Neighbors’ Investment Choices,” Review of Financial Studies 20:4(2007): 1327–1357, and Jeffery R. Brown, Zoran Ivkovic, Paul A. Smith, and Scott Weisbenner, “Neighbors Matter: Causal Community Effects and Stock Market Participation,” Journal of Finance 63:3(2008): 1509–1531. Pool, Stoffman, and Yonker, 2015, “The People in Your Neighborhood: Social Interactions and Mutual Fund Portfolios,” Journal of Finance 70(6), 2679-2731. Neighborly Influence 4 Social Influences Social norms The informal opinions, rules, and procedures of a group. Your peers and social groups influence your investment participation Herding The movement into or out of a stock or industry of companies by large groups of investors. Desire for unprofitable Internet companies in late 1990s Meme investors herding into GameStop 5 The Friends You Keep Peer effects impact your investment choices Pension plan participation in 11 different libraries at a large public university Librarians should be able to find the information that contributing is a good idea Yet, participation is highly dependent on work location Esther Duflo and Emmanuel Saez, “Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues’ Choices,” Journal of Public Economics 85(2002): 121–148 6 Wincapita Ponzi Scheme Finnish “investment” operation