Peer Effects in Risk Aversion and Trust

Abstract

Existing evidence shows that risk aversion and trust are largely determined by environmental factors. We test whether one such factor is peer influence. Using random assignment of MBA students to peer groups and predetermined survey responses of economic attitudes, we find causal evidence of positive peer effects in risk aversion and no effects in trust. After the first year of the MBA program, the difference between an individual and her peers' average risk aversion has shrunk by 41%. Finding no peer effects in trust is consistent with recent research showing that distinct cognitive processes govern risk aversion and trust. (JEL D81, D83, D01) Risk aversion and trust are central to much of economic thought, including contract theory, financial economics, and theories of investment. 1 However, our understanding of how these attitudes form and evolve is limited. Recent research finds that genetics explain about 20% of the cross-sectional variation in risk aversion and trust (Cesarini et al. 2008, 2009). This leaves 80% of the variation to be explained by unknown environmental forces. And, unlike genetics, a person's environment is not constant. As environments fluctuate throughout life, attitudes toward risk and trust could shift too. Given that these For helpful comments, we thank two anonymous referees, Alexander Ljungqvist (Editor),

The Influence of Plan Demographics on Contribution Behavior of 401(k) Participants

“…For peer effects, Manski (1993Manski ( , 2000 delineates three sources of potential similarity in observed behavior: (1) endogenous peer effects, where an individual's behavior varies with the observed behaviors (such as actions or outcomes) of the group; (2) contextual peer effects, where an individual's behavior varies with the exogenous characteristics of the group; and (3) correlated effects, where individuals within a group behave similarly because they endogenously select peers who are similar to themselves or because they all face similar institutional environments. Ahern et al (2014) further distinguish the three peer effects. The correlated effects lead to a similarity in the outcomes of individuals and peers but do not reflect social interactions.…”

“…Ahern et al. () further distinguish the three peer effects. The correlated effects lead to a similarity in the outcomes of individuals and peers but do not reflect social interactions.…”

Peer effects in risky choices among adolescents

“…Similarly, there may be selection in the sorting of adolescents into classes (due to geographic proximity, family background, and so forth), either by parental or school influence on class assignment (see, inter alia, Jackson and Rogers (2007) for evidence on social sorting processes). Secondly, attending the same class or friendship may result in convergence in risk preferences over time (Ahern et al, 2014). The objective of this paper is not to differentiate betweeen friends' assortative matching (or selective sorting into classes) and subsequent convergence in preferences as relations deepen.…”

“…In a recent study, Ahern et al (2014) showed in a sample of MBA students that peer effects lead to a convergence of risk attitudes over the course of one academic year. We find different results.…”

“…7 One reason for the differences in the results may be that in Ahern et al (2014), peer influences may interact with learning on the course, as financial risk is one of the major components of the MBA curriculum.…”