Understanding Mechanisms Underlying Peer Effects: Evidence from a Field Experiment on Financial Decisions

This paper presents the results of a high-stakes field experiment conducted with a financial brokerage to implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. The experiment involves estimating the efforts of learning plus possession, and learning alone, relative to a (no information) control group. Key findings include:

• 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;
• Investors report motivations consistent with 'keeping up with the Joneses' when learning about their peer's possession of the asset;
• Significant social utility effects suggest that information provision will not reduce herding as much as one would expect from a model that includes only social learning effects. Even if individuals are financially sophisticated, and have very precise private signals of asset quality, they may choose to follow their peers for social utility reasons.