Social Interaction and Stock Market Participation

Abstract

We investigate the idea that stock-market participation is influenced by social interaction. We build a simple model in which any given "social" investor finds it more attractive to invest in the market when the participation rate among his peers is higher. The model predicts higher participation rates among social investors than among "nonsocials". It also admits the possibility of multiple social equilibria. We then test the theory using data from the Health and Retirement Study. Social households-defined as those who interact with their neighbors, or who attend church-are indeed substantially more likely to invest in the stock market than non-social households, controlling for other factors like wealth, race, education and risk tolerance. Moreover, consistent with a peereffects story, the impact of sociability is stronger in states where stock-market participation rates are higher.

Social Capital and Debt Contracting: Evidence from Bank Loans and Public Bonds

“…Among these studies, there is strong evidence that social influences affect the decisions made by individuals. For example, Hong, Kubik, and Stein (2004) find that the frequency of a person's social interactions enhances his or her participation in the stock market. Pevzner, Xie, and Xin (2015) find that residents in societies with higher levels of trustworthiness perceive corporate earnings information as more credible.…”

Cognitive abilities and portfolio choice

“…Thus, the experience of peers about the performance of their investments is passed on to others. Hong, Kubik and Stein (2004) show that stock market participation is higher among more socially connected individuals. Furthermore, this effect is stronger among individuals living in communities with a higher participation rate to begin with, implying that social learning interacts positively with learning induced by market development.…”

“…Recent studies have also found associations between stockholding and background income risk (Guiso, Jappelli and Terlizzese, 1996;Heaton and Lucas, 2000), health status (Rosen and Wu, 2003), culture and social interactions (Grinblatt and Keloharju, 2001;Hong, Kubik and Stein, 2004), computer and Internet use, Bogan (2006), financial literacy (Van Rooij, Alessie, and Lusardi, 2007). Our paper complements this literature studying the relation between cognitive skills and stockholding, and offers also a systematic account of the main factors affecting household portfolio choice in Europe using fully comparable microeconomic data.…”

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households*

“…This is also true for the recent literature that has shown the importance of social attitudes for portfolio choice decisions. For instance, Duflo and Saez (2002) and Hong, Kubik and Stein (2004) have studied the effect of social interactions (as a mechanism through which information can be transmitted) on participation in pension plans and in the stock market, respectively. 1 Zingales (2004, 2008) have studied the effect of trusting behavior on portfolio choice decisions.…”