Lecture 9-Social interaction and investing Flashcards
Conversation in relation to social interaction and investing
People learn through interacting with other people
• We talk about our beliefs about investing and seek the
opinions of others
• Various financial channels, Bloomberg TV, radio
shows, blogs, social media etc impact on our
investment behaviour
• As more people talk about investing, others become
interested too
Social people and interaction with stock markets
Social people are more likely to learn about investing
than less social people
• Interaction makes people more comfortable
investing
• Highly social people are more likely to invest in the
stock market or participate in their pension plan
Social people and investing
Survey of 7,500 households in Health and Retirement
Study of Households by Hong et al (2004), found
that:
₋
Social households are more likely to invest in the stock
market than non-social households and that social
households that live in areas with high stock market
participation are even more likely to invest in the stock
market if they are socially active
Neighbourly influence Ivokvovic & Weisbenner (2007)
-argue that
information about investing will diffuse through
neighbourhoods from word-of-mouth effects
10% increase in purchase, neighbours increase by 2%
What is the social effect?
The degree to which a person is influenced by the
actions and thinking of others is related to a number
of social factors (Schachter et al. 1986)
For instance, people who are well connected in a
social network will be listened to by numerous other
people
• This gives the well connected people “social
influence”
Social infleuence effect
Social influence is strongest in conditions of
uncertainty and when self-confidence is low. It is
also strong with substantial changes in circumstances,
and rises with the extent that previously held views
are demonstrated to be incorrect” Redhead (2008:32)
-Social influence itself is affected by other
characteristics such as status, expertise and social
mood.
Peer group pressure
Members of peer groups may share attitudes and
norms (through influencing each other)
– Pension scheme participation is influenced by peer
groups (Duflo and Saez, 2002)
Investment clubs
group of family members,
friends or co-workers who have banded together to
pool their money and invest it in stock market
• These groups typically meet once in every month
and discuss potential stock investments
• Every month, the members each contribute some
nominal amount which is pooled and invested
• Two types of investment clubs are;
– Clubs serious about socialisation
– Clubs serious about investing
Problems with investment clubs
- Overconfidence and disposition effect
- THey tend to herdstocks
Role of media
Creates interest by focussing on the stock market leading to bubbles and crashes
What is normative social influence?
• Normative social influence entails changes in
behaviour but not in thoughts.
– For example, investment professionals may copy each
other to avoid career risk.
– Being wrong when everyone else is wrong will not
jeopardise their careers
– Being wrong when everyone else is right can result in job
losses
