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.
There are a few reasons why this is the case. Financial knowledge, obviously, helps. Interacting with others helps reduce the time and effort required to obtain important information. Having financial knowledge may result in more opportunities to acquire broader knowledge and reinforce what a person already knows by interacting with others who are financially literate. It can also be easier to absorb and process information if a certain amount of knowledge already exists. Finally, there is also an observational effect: People mimic what they see others doing. If a person’s social network allocates to stocks, they are more likely to as well.
Where a positive relationship did not exist is between having the social network and choosing the money market fund, which was the default option. The researchers said the decision to allocate to the default option or not to allocate to it was based primarily on financial knowledge and not the social network. They did not give a reason why, however.
“Do Financial Networks Matter in Retirement Decisions? Experimental Survey Evidence,” by Yunhyung Chung and Youngkyun Park, September 2013.