Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors

45 Pages Posted: 18 Mar 2012

See all articles by Timothy (Jun) Lu

Timothy (Jun) Lu

Peking University HSBC Business School

Multiple version iconThere are 3 versions of this paper

Date Written: March 15, 2012

Abstract

This paper explores whether social interactions influence investors’ decisions to hold equity and allocate their portfolios, in the context of defined contribution retirement savings accounts. Using a rich dataset of 401(k) plans, we examine social interaction effects within workplaces. We provide empirical evidence that participants are influenced by their coworkers when they make equity investment decisions. Specifically, we show that 401(k) investors are likely to increase their risky share by 1.4 percentage point if their peers earned strongly positive equity returns in the past period relative to average returns. This effect is even stronger in workplaces where the equity exposure rate is high, suggesting that risk-loving people are more likely to be impressed by short-term excess equity returns and increase their risk exposure. Moreover, individuals are also likely to decrease their risky share by 0.9 percentage point when past peer equity returns are strongly negative. When peer equity returns are modestly positive or negative, this has relatively little on 401(k) investors’ equity exposure adjustment. These results are consistent with the limited attention hypothesis that people are more likely to pay attention to significant outcomes. We also show that workplace size does not have much of an impact on the magnitude of social interaction effect.

Keywords: social interaction, investor behavior, portfolio choice, peer effect, 401(k)

JEL Classification: G11, D83

Suggested Citation

Lu, Timothy (Jun), Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(K) Pension Plan Investors (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024095 or http://dx.doi.org/10.2139/ssrn.2024095

Timothy (Jun) Lu (Contact Author)

Peking University HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China

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