Are people able to influence your decisions?

Responsible researcher: Angelo Cruz do Nascimento Varella

Article title: UNDERSTANDING MECHANISMS UNDERLYING PEER EFFECTS: EVIDENCE FROM A FIELD EXPERIMENT ON FINANCIAL DECISIONS

Article authors: Leonardo Bursztyn, Florian Ederer Bruno Ferman and Noam Yuchtman

Location of intervention: Brazil

Sample size: 150 investor pairs

Big topic: Finance

Type of Intervention: Experiment on investment decisions

Variable of Main Interest: Social influence

Evaluation method: Experimental Evaluation (RCT)

Policy Problem

Recurrently, the choices of relatives, friends and professionals we admire influence our own decisions. This phenomenon, called social influence, affects our preferences for products and services, having a direct impact on our lives and society as a whole. However, peer choices are not always the best options and, in these cases, the influence that such choices have on individual decisions generates undesirable consequences, privately and collectively.

Such social consequences can be observed in different sectors, such as public health and commerce, but they have a particularly worrying impact on the financial market. This is because social influence is linked to herd movements and other market imperfections that generate excessive volatility and add uncertainty.

Assessment Context

Despite the understanding that peer influence affects individuals' decisions, it is still necessary to investigate how this phenomenon occurs, specifically which are the channels of social influence that impact investors' financial decisions. This research points to two channels through which social influence can occur.

Firstly, social learning is characterized by the effect that a peer's interest in acquiring an asset generates on a person's decisions. Basically, it is the individual conclusion that the other's desire to obtain a good or asset is derived from a positive characteristic of that item.

Secondly, social utility is configured by the influence resulting from the possession of an asset by a peer, that is, the indication of possession of an asset also has effects on an individual's decision to acquire or not the item in question.

Obviously, both channels are amplified if individuals perceive characteristics of experience or wisdom in their peers.

Policy Details

In order to investigate and measure social influence on Brazilian investors, the researchers worked together with a large financial brokerage, in 2012, to create an experiment that could investigate the social influence of both learning and decision-making channels. end of investors.

Thus, the researchers offered a new financial asset to 150 pairs of investors who had a close personal relationship (friends and family) and who were clients of the partner brokerage. The aim was to offer a high-risk asset, with a minimum investment of R$2,000, which represented around half of the average monthly income of the selected investors.

Each pair of investors was randomly classified as Investor 1 and Investor 2. The first investor was given the chance to invest in the asset without information about the second individual. For the second investor, different types of information were provided, depending on draws.

Assessment Method

There is an inherent difficulty in differentiating the channels of social influence, since the interest in acquiring and the acquisition itself are confused in empirical analyses. Thus, researchers used lotteries to randomize the available information and separate each type of social influence in an effective way.

  When contacting Investor 1, the researchers stated that the investment was scarce and drew lots for the possibility of the individual actually acquiring the asset. Then, they carried out a new draw and called Investor 2. According to the result of this new lottery, the second investor was informed about the intention or acquisition of the asset by the first investor.

If the second investor knew that the first investor intended to buy the asset but was unable to do so, there would be a learning influence channel without social utility. If, on the contrary, he knew about the successful acquisition by the first investor, there would be a situation of learning and social utility, thus separating the two conditions into isolated situations.

Results

The results obtained point to positive effects derived from both channels of social influence. It was also possible to observe that the effects were greater in investors with less sophistication in finance, a measure taken from a questionnaire applied after the experiment. In other words, investors with less experience and knowledge of finance tend to be more influenced by social factors.

With regard to social learning, when Investors 2 knew that Investors 1 wanted to acquire the asset, the purchase intention was positive on 71% of occasions, a result considerably superior to the group of Investors 2 who did not receive such information and were interested. by the asset in just 42% of opportunities.

In situations in which Investors 2 received information that Investors 1 had in fact acquired the asset, configuring a situation of learning and social utility, Investors 2 chose to acquire the asset in 93% of cases.

Public Policy Lessons

The results demonstrate the importance and magnitude of social influence on the decisions of Brazilian investors. This fact is relevant as it demonstrates that social factors are decisive in the individual decision-making process and, consequently, affect society as a whole. Not only does social influence directly impact the financial market, the research findings are important for the formulation of public policies capable of exploring such characteristics.

The example of public health stands out, such as vaccination campaigns and encouraging healthy habits, such as physical exercise and a balanced diet. By exploring social influence channels, it is possible to maximize campaign results, for example, and encourage collective good practices. Experiments in finance are useful in this sense, as they allow us to explore psychological axioms and enable a better understanding of human nature.

Reference

BURSZTYN, Leonardo et al. Understanding mechanisms underlying peer effects: Evidence from a field experiment on financial decisions. Econometrica, vol. 82, no. 4, p. 1273-1301, 2014.