Teachers teaching teachers: The role of workplace peer effects in financial decisions
| Authors | Maturana, Nickerson |
| Journal | Review of Financial Studies |
| Year | 2018 |
| Type | Published Paper |
| Abstract | This paper studies the role of workplace peers in the transmission of information pertinent to an important household financial decision: the mortgage refinancing choice. Exploiting commonalities in teaching schedules of school teachers in Texas to identify peer groups, we find that refinancing activity among teachers' peers increases their likelihood of refinancing by 20.7%. The effect of peers increases with the potential savings realized upon refinancing and is stronger among younger teachers. Peers also affect teachers' choice of lender. Overall, our findings suggest that peer interactions greatly reduce a household's cost of acquiring and processing financial information. |
| URL | https://doi.org/10.1093/rfs/hhy136 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) |
In the red: The effects of color on investment behavior
| Authors | Bazley, Cronqvist, Mormann |
| Year | 2017 |
| Type | Working Paper |
| Abstract | Financial decisions in today's society are made in environments that involve color stimuli. In this paper, we perform an empirical analysis of the effects of color on investment behavior. First, we find that when investors are displayed potential losses in red, risk taking is reduced. Second, when investors are shown past negative stock price paths in red, expectations about future stock returns are reduced. Consistent with red causing "avoidance behavior", red color reduces investors' propensity to purchase stocks. The findings are robust to a series of checks involving colorblind investors and alternative colors to control for salience effects. Finally, the effects are muted in a cultural setting, e.g., China, where red is not used to visualize financial losses. A contribution of this study is to introduce hypotheses from color psychology and visual science to enhance our understanding of the behavior of individual investors. |
| Keywords | Visual finance, investor behavior, cultural finance |
| URL | https://www.chapman.edu/research/institutes-and-centers/economic-science-institute/_files/ifree-papers-and-photos/paper-cronqvist.pdf |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Credit scores, social capital, and stock market participation
| Authors | Bricker, Li |
| Year | 2017 |
| Type | Working Paper |
| Abstract | While a rapidly growing body of research underscores the influence of social capital on financial decisions and economic developments, objective data-based measurements of social capital are lacking. We introduce average credit scores as an indicator of a community's social capital and present evidence that this measure is consistent with, but richer and more robust than, those used in the existing literature, such as electoral participation, blood donations, and survey-based measures. Merging unique proprietary credit score data with two nationwide representative household surveys, we show that households residing in communities with higher social capital are more likely to invest in stocks, even after controlling for a rich set of socioeconomic, preferential, neighborhood, and demographic characteristics. Notably, such a relationship is robustly observed only when social capital is measured using community average credit scores. Consistent with the notion that social capital and trust promote stock investment, we find the following: first, the association between average credit score and stock ownership is more pronounced among the lower educated; second, social capital levels of the county where one grew up appear to have a lasting influence on future stock investment; and third, investors who did not own stocks before have a greater chance of entering the stock market a few years after they relocate to higher-score communities. |
| Keywords | Credit scores, social capital, stock market participation, trust |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911760 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Moral incentives in credit card debt repayment: Evidence from a field experiment
| Authors | Bursztyn, Fiorin, Gottlieb, Kanz |
| Journal | Journal of Political Economy |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We study the role of morality in debt repayment, using an experiment with the credit card customers of a large Islamic bank in Indonesia. In our main treatment, clients receive a text message stating that "non-repayment of debts by someone who is able to repay is an injustice." This moral appeal decreases delinquency by 4.4 percentage points from a baseline of 66 percent and reduces default among customers with the highest ex ante credit risk. Additional treatments help benchmark the effects against direct financial incentives and rule out competing explanations, such as reminder effects, priming religion, and provision of new information. |
| Keywords | Moral norm, financial behavior, field experiment |
| URL | https://doi.org/10.1086/701605 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
From financial history to history & finance
| Authors | D'Acunto |
| Year | 2017 |
| Type | Working Paper | Literature Review Paper |
| Abstract | Financial history studies facts and institutions of the past. Such facts and institutions are interesting subjects in themselves, or they can help us interpret the present through analogy. History & Finance reverses the role of history in finance research: it exploits natural experiments of the past as a means to directly explaining current financial outcomes through the long-run persistence of economic and social phenomena. I first define the History & Finance approach and its relationship to Economic and Financial history. Then, I survey the work based on History & Finance across the subfields of finance. I discuss the challenges raised by History & Finance, and how researchers have thus far tackled them. Finally, I comment on the avenues for future research that History & Finance opens to finance scholars and economic historians alike. |
| Keywords | Historical facts, institutional backgrounds, natural experiments, history & finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3216109 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Evolutionary Finance | Financing- and Investment Decisions (Individual) | Manager / Firm Behavior |
Trust busting: The effect of fraud on investor behavior
| Authors | Gurun, Stoffman, Yonker |
| Journal | Review of Financial Studies |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We study the importance of trust in the investment advisory industry by exploiting the geographic dispersion of victims of the Madoff Ponzi scheme. Residents of communities that were exposed to the fraud subsequently withdrew assets from investment advisers and increased deposits at banks. Additionally, exposed advisers were more likely to close. Advisers who provided services that can build trust, such as financial planning advice, experienced fewer withdrawals. Our evidence suggests that the trust shock was transmitted through social networks. Taken together, our results show that trust plays a critical role in the financial intermediation industry. |
| Keywords | Social trust, investor behaviors, investment decisions, social networks, financial intermediaries |
| URL | https://doi.org/10.1093/rfs/hhx058 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure |
Social capital and debt contracting: Evidence from bank loans and public bonds
| Authors | Hasan, Hoi, Wu and Zhang |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We find that firms headquartered in U.S. counties with higher levels of social capital incur lower bank loan spreads. This finding is robust to using organ donation as an alternative social capital measure and incremental to the effects of religiosity, corporate social responsibility, and tax avoidance. We identify the causal relation using companies with a social-capital-changing headquarters relocation. We also find that high-social-capital firms face loosened nonprice loan terms, incur lower at-issue bond spreads, and prefer public bonds over bank loans. We conclude that debt holders perceive social capital as providing environmental pressure that constrains opportunistic firm behaviors in debt contracting. |
| Keywords | Social capital, bank loan cost, firm's financing decisions, debt contracting, investors' decisions |
| URL | https://doi.org/10.1017/S0022109017000205 |
| Tags | Archival Empirical | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior |
Social screens and systematic investor boycott risk
| Authors | Luo, Balvers |
| Journal | Journal of Financial and Quantitative Analysis |
| Year | 2017 |
| Type | Published Paper |
| Abstract | We model the pricing implications of screens adopted by socially responsible investors. The model reproduces the empirically observed abnormal return to sin stock and implies a premium for systematic investor boycott risk that affects targeted as well as nontargeted firms. The investor boycott premium is not displaced by litigation risk, measures of neglect effect, illiquidity, industry momentum, or concentration. The investor boycott risk factor is useful in explaining mean returns across industries, and its premium varies with the relative wealth of socially responsible investors and the business cycle. |
| Keywords | Socially responsible investing, sin stocks, boycott risk premium, stock returns |
| URL | https://doi.org/10.1017/S0022109016000910 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Theory |
Socioeconomic status and learning from financial information
| Authors | Miu, Kuhnen |
| Journal | Journal of Financial Economics |
| Year | 2017 |
| Type | Published Paper |
| Abstract | The majority of lower socioeconomic status (SES) households in the U.S. and Europe do not have stock investments, which is detrimental to wealth accumulation. Here, we examine one explanation for this puzzling fact, namely, that economic adversity may influence how people learn from financial information. Using experimental and survey data from the U.S. and Romania, we find that lower SES individuals form more pessimistic beliefs about the distribution of stock returns and are less likely to invest in stocks when these investments are likely to have good outcomes. SES-related differences in pessimism may help explain variation in investments across households. |
| Keywords | Socioeconomic status, learning, beliefs, household finance, stock market participation |
| URL | https://doi.org/10.1016/j.jfineco.2017.03.002 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Narrative economics
| Authors | Shiller |
| Journal | American Economic Review |
| Year | 2017 |
| Type | Published Paper | Literature Review Paper |
| Abstract | This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives "go viral" and spread far, even worldwide, with economic impact. The 1920-1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007-2009, and the contentious political-economic situation of today are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future. |
| Keywords | Narrative, social psychology, social epidemics, economic behaviors |
| URL | https://www.aeaweb.org/articles?id=10.1257%2Faer.107.4.967&msclkid=bd5677ccaa8411ec80ac1e25c5639856 |
| Tags | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Propagation of Noise / Undesirable Outcomes |
Pockets of poverty: The long-term effects of redlining
| Authors | Appel, Nickerson |
| Year | 2016 |
| Type | Working Paper |
| Abstract | This paper studies the long-term effects of redlining policies that restricted access to credit in urban communities. For empirical identification, we use a regression discontinuity design that exploits boundaries from maps created by the Home Owners Loan Corporation (HOLC) in 1940. We find that "redlined" neighborhoods have 4.8% lower home prices in 1990 relative to adjacent areas. This finding is robust to the exclusion of boundaries that coincide with the physical features of cities (e.g., rivers, landmarks). Moreover, we show that housing characteristics varied smoothly at the boundaries when the maps were created. Evidence suggests lower property values may be driven by negative externalities associated with fewer owner-occupied homes and more vacant structures. Overall, our results indicate the effects of discriminatory credit rationing can persist decades after such practices are formally discontinued. |
| Keywords | Redlining, credit rationing, household finance |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2852856 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Financing- and Investment Decisions (Individual) |
Social networks and housing markets
| Authors | Baily, Cao, Kuchler, Stroebel |
| Year | 2016 |
| Type | Working Paper |
| Abstract | We document that the recent house price experiences within an individual's social network affect her perceptions of the attractiveness of property investments, and through this channel have large effects on her housing market activity. Our data combine anonymized social network information from Facebook with housing transaction data and a survey. We first show that in the survey, individuals whose geographically-distant friends experienced larger recent house price increases consider local property a more attractive investment, with bigger effects for individuals who regularly discuss such investments with their friends. Based on these findings, we introduce a new methodology to document large effects of housing market expectations on individual housing investment decisions and aggregate housing market outcomes. Our approach exploits plausibly-exogenous variation in the recent house price experiences of individuals' geographically-distant friends as shifters of those individuals' local housing market expectations. Individuals whose friends experienced a 5 percentage points larger house price increase over the previous 24 months (i) are 3.1 percentage points more likely to transition from renting to owning over a two-year period, (ii) buy a 1.7 percent larger house, (iii) pay 3.3 percent more for a given house, and (iv) make a 7% larger downpayment. Similarly, when homeowners' friends experience less positive house price changes, these homeowners are more likely to become renters, and more likely to sell their property at a lower price. We also find that when individuals observe a higher dispersion of house price experiences across their friends, this has a negative effect on their housing investments. Finally, we show that these individual-level responses aggregate up to affect county-level house prices and trading volume. Our findings suggest that the house price experiences of geographically-distant friends might provide a valid instrument for local house price growth. |
| Keywords | House price, social contagion, investor behaviors, market expectation |
| URL | https://www.nber.org/papers/w22258 |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis | Social Network Structure |
Peer pressure: Social interaction and the disposition effect
| Authors | Heimer |
| Journal | Review of Financial Studies |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage. |
| URL | https://doi.org/10.1093/rfs/hhw063 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Media and Textual Analysis |
Peer pressure: Social interaction and the disposition effect
| Authors | Heimer |
| Journal | The Review of Financial Studies |
| Year | 2016 |
| Type | Published Paper |
| Abstract | Social interaction contributes to some traders' disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader's disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage. |
| URL | https://econpapers.repec.org/article/ouprfinst/v_3a29_3ay_3a2016_3ai_3a11_3ap_3a3177-3209..htm |
| Tags | Archival Empirical | Asset Pricing, Trading Volume and Market Efficiency | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes | Social Network Structure | Social Transmission Biases |
The effect of providing peer information on retirement savings decisions
| Authors | Beshears, Choi, Laibson, Madrian, Milkman |
| Journal | Journal of Finance |
| Year | 2015 |
| Type | Published Paper |
| Abstract | Using a field experiment in a 401(k) plan, we measure the effect of disseminating information about peer behavior on savings. Low-saving employees received simplified plan enrollment or contribution increase forms. A randomized subset of forms stated the fraction of age-matched coworkers participating in the plan or age-matched participants contributing at least 6% of pay to the plan. We document an oppositional reaction: the presence of peer information decreased the savings of nonparticipants who were ineligible for 401(k) automatic enrollment, and higher observed peer savings rates also decreased savings. Discouragement from upward social comparisons seems to drive this reaction. |
| URL | https://doi.org/10.1111/jofi.12258 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Tear down this wall street: Anti-market rhetoric, motivated beliefs, and investment
| Authors | D'Acunto |
| Year | 2015 |
| Type | Working Paper |
| Abstract | Anti-market ideology pre-exists modern capitalism, is diffused in capitalistic economies, and peaks during economic crises. Is anti-market ideology an inert cultural by-product of crises, or does it affect economic decision making? If it does, through which channels? I manipulate exposure to anti-market ideology in an artefactual field experiment. Subjects exposed to anti-market ideology invest less often and less money in risky financial opportunities than controls. The effect is stronger for women, older, and college-educated subjects. Risk aversion does not change with exposure. Instead, treated subjects have a more negative view of the financial sector, even if they do not realize they are exposed to anti-market ideology. They react to positive news but not to negative news regarding investment payoffs in subsequent investment choices. These results are consistent with context-dependent beliefs. Contrary to behavioral biases, anti-market ideology makes more sophisticated agents deviate from neoclassical decision-making. |
| Keywords | Cultural economics, behavioral finance, norms and values, context-dependent beliefs, trust, priming |
| URL | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2705545 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |
Suspense and surprise
| Authors | Ely, Frankel, Kamenica |
| Journal | Journal of Political Economy |
| Year | 2015 |
| Type | Published Paper |
| Abstract | We model demand for noninstrumental information, drawing on the idea that people derive entertainment utility from suspense and surprise. A period has more suspense if the variance of the next period's beliefs is greater. A period has more surprise if the current belief is further from the last period's belief. Under these definitions, we analyze the optimal way to reveal information over time so as to maximize expected suspense or surprise experienced by a Bayesian audience. We apply our results to the design of mystery novels, political primaries, casinos, game shows, auctions, and sports. |
| URL | https://www.journals.uchicago.edu/doi/full/10.1086/677350 |
| Tags | Consumer Decisions | Financing- and Investment Decisions (Individual) | Investment Decisions (Institutional) | Manager / Firm Behavior | Social Transmission Biases | Theory |
Facebook finance: How social interaction propagates active investing
| Authors | Heimer, Simon |
| Year | 2015 |
| Type | Working Paper |
| Abstract | This paper shows how active investing strategies propagate through social connections in a network of retail traders, using a new database of social activity linked to individual-level trading records. A trader's good short-term performance causes them to contact others. A trader's activity increases when peers perform well and increase communication. We use the staggered entry of brokerages into partnerships with the social networking platform, which is a necessary precursor for traders to access the network, to argue these effects are causal. This pattern of communication supports active trading, even though the network reveals the low success rate of retail traders. |
| URL | https://EconPapers.repec.org/RePEc:fip:fedcwp:1522 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Social Transmission Biases |
Social interaction at work
| Authors | Hvide, Ostberg |
| Journal | Journal of Financial Economics |
| Year | 2015 |
| Type | Published Paper |
| Abstract | Stock market investment decisions of individuals are positively correlated with those of coworkers. Sorting of unobservably similar individuals to the same workplaces is unlikely to explain this pattern, as evidenced by the investment behavior of individuals who move between plants. Purchases made under stronger coworker purchase activity are not associated with higher returns. Moreover, social interaction appears to drive the purchase of within-industry stocks. Overall, we find a strong influence of coworkers on investment choices, but not an influence that improves the quality of investment decisions. |
| Keywords | Individual investors, peer effects, social interaction, investment decisions, stock selection |
| URL | https://doi.org/10.1016/j.jfineco.2015.06.004 |
| Tags | Archival Empirical | Financing- and Investment Decisions (Individual) | Propagation of Noise / Undesirable Outcomes |
Understanding mechanisms underlying peer effects: Evidence from a field experiment on financial decisions
| Authors | Bursztyn, Ederer, Ferman, Yuchtman |
| Journal | Econometrica |
| Year | 2014 |
| Type | Published Paper |
| Abstract | Using a high-stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice ("social learning") and because his possession of the asset directly affects others' utility of owning the same asset ("social utility"). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (i) receives no information about the first member, or (ii) is informed of the first member's desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that both social learning and social utility channels have statistically and economically significant effects on investment decisions. Evidence from a follow-up survey reveals that social learning effects are greatest when the first (second) investor is financially sophisticated (financially unsophisticated); investors report updating their beliefs about asset quality after learning about their peer's revealed preference; and, they report motivations consistent with "keeping up with the Joneses" when learning about their peer's possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions. |
| URL | https://doi.org/10.3982/ECTA11991 |
| Tags | Experimental / Survey-Based Empirical | Financing- and Investment Decisions (Individual) |