Peer Effects and Risk Sharing in Experimental Asset Markets

SAFE Working Paper No. 67

40 Pages Posted: 3 Oct 2014 Last revised: 2 Feb 2015

See all articles by Sascha Baghestanian

Sascha Baghestanian

Goethe University; Goethe University Frankfurt - Research Center SAFE

Paul Gortner

Goethe University Frankfurt - Research Center SAFE

Joel J. van der Weele

University of Amsterdam - Center for Experimental Economics and political Decision making (CREED); Tinbergen Institute; Center for Financial Studies (CFS)

Date Written: February 2, 2015

Abstract

Previous research has documented strong peer effects in risk taking, but little is known about how such social influences affect market outcomes. Since the consequences of social interactions are hard to isolate in financial data, we design an experimental asset market with multiple risky assets and study how exogenous variation in real-time information about the portfolios of peer group members affects aggregate and individual risk taking. We find that peer information reduces under-diversification through changes in risk attitudes that last beyond the market environment. The effect of information depends on its framing: highlighting the highest earning trader increases willingness to take risk and average exposure in the market. Our results show that peer information is an important determinant of earnings volatility in financial markets, and we discuss implications for institutional design.

Keywords: peer effects, laboratory experiments, risk taking, asset markets

JEL Classification: D53, D83, G11

Suggested Citation

Baghestanian, Sascha and Gortner, Paul and van der Weele, Joel J., Peer Effects and Risk Sharing in Experimental Asset Markets (February 2, 2015). SAFE Working Paper No. 67. Available at SSRN: https://ssrn.com/abstract=2504541 or http://dx.doi.org/10.2139/ssrn.2504541

Sascha Baghestanian

Goethe University ( email )

Gr├╝neburgplatz 1
D-60323
Frankfurt, Hessen 60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Paul Gortner

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Joel J. Van der Weele (Contact Author)

University of Amsterdam - Center for Experimental Economics and political Decision making (CREED) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://https://sites.google.com/site/joelvdweele/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Center for Financial Studies (CFS) ( email )

Gr├╝neburgplatz 1
Frankfurt am Main, 60323
Germany

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