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Good Peers, Good Apples? Peer Effects in Portfolio Quality

Author

Listed:
  • Olga Balakina

    (Department of Economics and Business Economics, Aarhus University)

  • Claes Bäckman

    (Department of Economics and Business Economics, Aarhus University, Knut Wiksell Center for Financial Studies, Lund University)

  • Andreas Hackethal

    (Goethe University Frankfurt, Leibniz Institute for Financial Research SAFE Frankfurt)

  • Tobin Hanspal

    (Department of Finance, Vienna University of Economics and Business)

  • Dominique M. Lammer

Abstract

Peer effects can lead to better financial outcomes or help propagate financial mistakes across social networks. Using unique data on peer relationships and portfolio composition, we show considerable overlap in investment portfolios when an investor recommends their brokerage to a peer. We argue that this is strong evidence of peer effects and show that peer effects lead to better portfolio quality. Peers become more likely to invest in funds when their recommenders also invest, improving portfolio diversification compared to the average investor and various placebo counterfactuals. Our evidence suggests that social networks can provide good advice in settings where individuals are personally connected.

Suggested Citation

  • Olga Balakina & Claes Bäckman & Andreas Hackethal & Tobin Hanspal & Dominique M. Lammer, 2022. "Good Peers, Good Apples? Peer Effects in Portfolio Quality," Economics Working Papers 2022-02, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:aarhec:2022-02
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    File URL: https://repec.econ.au.dk/repec/afn/wp/22/wp22_02.pdf
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    References listed on IDEAS

    as
    1. Yannis Bilias & Dimitris Georgarakos & Michael Haliassos, 2010. "Portfolio Inertia and Stock Market Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(4), pages 715-742, June.
    2. Sandro Ambuehl & B. Douglas Bernheim & Fulya Ersoy & Donna Harris, 2018. "Peer Advice on Financial Decisions: A case of the blind leading the blind?," NBER Working Papers 25034, National Bureau of Economic Research, Inc.
    3. Gonzalo Maturana & Jordan Nickerson, 2019. "Teachers Teaching Teachers: The Role of Workplace Peer Effects in Financial Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 32(10), pages 3920-3957.
    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Kormanyos, Emily & Hanspal, Tobin & Hackethal, Andreas, 2023. "Do gamblers invest in lottery stocks?," SAFE Working Paper Series 373, Leibniz Institute for Financial Research SAFE, revised 2023.

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    More about this item

    Keywords

    Household finance; investment decisions; investment behavior; peer effects; social networks;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G4 - Financial Economics - - Behavioral Finance

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