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http://ssrn.com/abstract=2101391
 
 

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Understanding Mechanisms Underlying Peer Effects: Evidence from a Field Experiment on Financial Decisions


Leonardo Bursztyn


University of California, Los Angeles (UCLA) - Anderson School of Management

Florian Ederer


Yale School of Management; Yale University - Cowles Foundation

Bruno Ferman


Sao Paulo School of Economics - FGV

Noam Yuchtman


University of California, Berkeley - Haas School of Business

March 16, 2014

Econometrica, Vol. 82, No. 4

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: (1) receives no information about the first member, or (2) 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.

Number of Pages in PDF File: 64

Keywords: peer effects, social learning, social preferences, portfolio choice

JEL Classification: C93, D03, D14, D83, G02, M31

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Date posted: July 5, 2012 ; Last revised: July 18, 2014

Suggested Citation

Bursztyn, Leonardo and Ederer, Florian and Ferman, Bruno and Yuchtman, Noam, Understanding Mechanisms Underlying Peer Effects: Evidence from a Field Experiment on Financial Decisions (March 16, 2014). Econometrica, Vol. 82, No. 4. Available at SSRN: http://ssrn.com/abstract=2101391 or http://dx.doi.org/10.2139/ssrn.2101391

Contact Information

Leonardo Bursztyn
University of California, Los Angeles (UCLA) - Anderson School of Management ( email )
110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
Florian Ederer (Contact Author)
Yale School of Management ( email )
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States
HOME PAGE: http://faculty.som.yale.edu/florianederer/

Yale University - Cowles Foundation ( email )
Box 208281
New Haven, CT 06520-8281
United States

Bruno Ferman
Sao Paulo School of Economics - FGV ( email )
Rua Itapeva n 474
Sao Paulo, DC 01332-000 20052
Brazil
HOME PAGE: http://https://sites.google.com/site/brunoferman/
Noam Yuchtman
University of California, Berkeley - Haas School of Business ( email )
545 Student Services Building
Berkeley, CA 94720
United States
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