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Peer effects on decision making in complex financial situations

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  • Das, Tanmoy
  • Banerjee, Priyodorshi

Abstract

Complex financial decisions such as portfolio allocation often have to be made. Increased complexity may raise the difficulty of reaching decisions or lower confidence in own decision-making, and this leads to social learning through greater reliance on the observed decisions of peers. We investigate this relationship through an artefactual field experiment. Subjects make the same portfolio allocation decision twice, the second time after unexpectedly observing the choice of a peer. Activity related to revision of prior choice provides a measure of peer effects. We manipulate complexity of the allocation problem between subjects and find that increased complexity heightens revision activity. We contribute to the literature analyzing the sources of peer effects on financial decisions. Our novelty lies in introducing the notion of decision complexity in this arena and showing that changes in the level of complexity might affect the degree of peer effects, in addition to social influence on individual decisions.

Suggested Citation

  • Das, Tanmoy & Banerjee, Priyodorshi, 2023. "Peer effects on decision making in complex financial situations," Economic Modelling, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:ecmode:v:127:y:2023:i:c:s0264999323002894
    DOI: 10.1016/j.econmod.2023.106477
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    More about this item

    Keywords

    Peer effects; Financial decision making; Complex decision problems; Bounded rationality; Naïve observational social learning;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements

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