Social Interaction and Stock Market Participation

Stanford Business School Working Paper

47 Pages Posted: 21 Jun 2001

See all articles by Jeffrey D. Kubik

Jeffrey D. Kubik

Syracuse University - Department of Economics

Harrison G. Hong

Columbia University, Graduate School of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2001

Abstract

We investigate the idea that stock-market participation is influenced by social interaction. We build a simple model in which any given "social" investor finds it more attractive to invest in the market when the participation rate among his peers is higher. The model predicts higher participation rates among social investors than among "non-socials". It also admits the possibility of multiple social equilibria. We then test the theory using data from the Health and Retirement Study. Social households-defined as those who interact with their neighbors, or who attend church-are indeed substantially more likely to invest in the stock market than non-social households, controlling for other factors like wealth, race, education and risk tolerance. Moreover, consistent with a peer-effects story, the impact of sociability is stronger in states where stock-market participation rates are higher.

Keywords: Stock market participation, social interaction, peer effects, word of mouth learning, consumption externalities

Suggested Citation

Kubik, Jeffrey D. and Hong, Harrison G. and Stein, Jeremy C., Social Interaction and Stock Market Participation (June 2001). Stanford Business School Working Paper, Available at SSRN: https://ssrn.com/abstract=274077 or http://dx.doi.org/10.2139/ssrn.274077

Jeffrey D. Kubik

Syracuse University - Department of Economics ( email )

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Syracuse, NY 13244-1020
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Harrison G. Hong (Contact Author)

Columbia University, Graduate School of Arts and Sciences, Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Jeremy C. Stein

Harvard University - Department of Economics ( email )

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United States
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617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

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