Personal Recommendations and Portfolio Quality

Abstract

Social interactions in finance can lead to better financial outcomes or help propagate financial mistakes. We develop a framework that incorporates two views of social interaction and provide empirical evidence of their relevance in a setting where individuals are personally connected with stronger ties than in an online community. Providing and accepting advice is positively related to portfolio quality but is not driven by high returns. Funds are more likely to be recommended than lottery or attention stocks, leading to increases in portfolio quality. Our evidence suggests that social networks can provide good advice in settings where individuals are personally connected.

Keywords: Social finance, portfolio choice, investment behavior, peer effects, household finance

JEL Classification: D14, G11, G40, G50