Social Networks Can Influence Portfolio Allocations

The financial knowledge of the people you interact with can impact your portfolio allocation decisions, especially if you and they are financially literate. This is the conclusion of two University of Idaho researchers who looked into the link between financial literacy and social networks.

Financial literacy is positively related to holding stocks in a portfolio and choosing stocks over a default option of a money market fund. Regularly interacting with others who are financially literate also has a significantly positive relationship on choosing to allocate to stocks. Notably, merely having a network of financially literate people is not enough to cause someone to bypass the default option of a money market fund.

These conclusions were reached after experiments were conducted with 98 senior business school students age 20 to 35. The students were tested on their financial literacy, asked about their financial networks and then were given hypothetical retirement portfolios to build. Those who were the most financially knowledgeable and had stronger relationships with other financially literate people were more likely to build a portfolio with an appropriate allocation.

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