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

42 Pages Posted: 9 Jun 2015

See all articles by Timothy (Jun) Lu

Timothy (Jun) Lu

Peking University HSBC Business School

Ning Tang

San Diego State University - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: May 9, 2015

Abstract

We show that participants are influenced by their coworkers when they make equity investment decisions. Using a rich dataset of 401(k) plans, we find that individuals are likely to increase (decrease) their risky share when they have lower (higher) equity exposure than their coworkers in the last period. The effect is especially strong when the difference in equity exposure is substantial. Furthermore, individuals are likely to increase their equity exposure if they earn lower equity returns than their coworkers did in the last period. However, when their returns on equity are higher than their peers’, they tend not to decrease their risky share. The interaction of peer behavior and peer outcome influences investment decisions, inducing individuals with substantially lower equity exposure than their coworkers to increase their risky share when coworkers also earned higher returns. Finally, we find that there exists heterogeneity in short-term excess returns following social interaction.

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

JEL Classification: G11, D83

Suggested Citation

Lu, Timothy (Jun) and Tang, Ning, Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(k) Pension Plan Investors (May 9, 2015). Available at SSRN: https://ssrn.com/abstract=2616108 or http://dx.doi.org/10.2139/ssrn.2616108

Timothy (Jun) Lu (Contact Author)

Peking University HSBC Business School ( email )

University Town
Nanshan District
Shenzhen, Guang Dong 518055
China

Ning Tang

San Diego State University - Finance Department ( email )

5500 Campanile Drive
San Diego, CA 92182-8236
United States

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