When we are investing, we don’t mindlessly copy our peers, according to new research carried out by Cambridge Centre for Finance (CCFin) Fellow Chryssi Giannitsarou and her research collaborators. Instead, we are more likely to participate in the stock market if we believe that our immediate social circle is more informed about it.
Giannitsarou and her co-authors, Luc Arrondel, Hector Calvo Pardo and Michael Haliassos, surveyed a representative sample of French households in 2014 and 2015 to capture measures of stock market participation and social connectedness, but also beliefs and perceptions of stock market returns. They wanted to find out whether those households invested by mindless copying, which may lead to stock market bubbles and fads, or by processing information and trying to copy good practice.
The results show that people who perceive a higher share of their financial circle as being informed about the stock market or participating in it are more likely to invest in stocks themselves. The conditional portfolio share invested in stocks is influenced by social interactions only to the extent that social interactions influence perceptions of past stock market performance and, through them, stock market expectations. There is a trace of mindless copying of behaviour, but only in the decision of whether or not to participate at all in the stock market.
All in all, their research findings suggest that social interactions tend to reduce rather than exacerbate financial literacy limitations, and to affect financial decision-making by being informative rather than ‘contagious’.