Informative Social Interactions

Abstract

Household finances are confidential and discussions are limited to a subset of peers. We collect novel representative survey data to examine separately whether interactions with inner and outer social circles influence return perceptions, expectations, and exposure to a widely known financial instrument in a developed economy with multiple information sources. We find that a respondent’s connectedness, proxied by perceived prevalence of information or participation in the small financial circle, improves expectation accuracy indirectly, through boosting accuracy of perceived past returns; and influences stock participation and exposure not only by influencing expectations, but also directly.

Keywords: Household finance; social interactions; subjective expectations; peer effects; information networks; portfolio choice.

JEL Classification: G5; D12; D83; D84; G11