Does interaction with peers significantly affect the choices of individual investors? Are some individuals more susceptible to such pressure than others? In their April 2008 paper entitled “Susceptibility to Interpersonal Influence in an Investment Context”, A. Hoffmann and Thijs Broekhuizen investigate how interpersonal influences affect the investment decisions of individuals and which individuals are most susceptible to such influences. Combining the results of a laboratory experiment involving 154 university students and a survey of 287 investors, they conclude that:
- Individuals who lack investing knowledge, perceive investing as a risky way to enhance status and have strong social need are especially susceptible to interpersonal influences. Social need is are the strongest indicator of such susceptibility.
- Interpersonal influences tend to align individual investment decisions with information/opinions provided by the influencers, even when such alignment means choosing an investment with low past returns. In other words, individuals appear to trade off investment returns for social rewards (or avoidance of social punishments).
- Individuals susceptible to informational interpersonal influences (tending to accept information from others as credible evidence about reality) trade infrequently. Individuals susceptible to normative interpersonal influences (tending to comply with expectations of others to achieve a sense of belonging or obtain social approval) trade frequently.
- In general, informational interpersonal influences shape individual investing behaviors more strongly than do normative interpersonal influences.
In summary, individuals should carefully consider whether validated information or peer pressure is driving their investing/trading behaviors.
