Annie Zhang and colleagues at Massey University in New Zealand have found that only around 10 per cent of the variation in pension fund asset allocation choices can be explained by differences in observable personal characteristics such as age, gender, wealth or income. What's twice as important as these, they've found, are peer effects: people's investment choices tend to resemble those of the people around them.
This is especially true for people living together. Whether this is because spouses take investment decisions for their partners, or because one influences the other is unclear. Whichever it is, it implies that households might not be as well-diversified as they think.
It's not just in households where asset allocation choices resemble others. "People in the same postal code tend to invest similarly," says Dr Zhang. And, she adds, co-workers' investment choices resemble each other more closely than chance would suggest.
This isn't true merely of investments. It's also true of changes in them; people are more likely to switch between funds if their spouses, neighbours and colleagues do. In fact, says Dr Zhang, peer pressure is a bigger influence upon investment than professional financial advice. She's found that while investors who take such advice are more likely to invest heavily in equities, the influence of such advice upon portfolios is smaller than the influence of investors' neighbours, partners and colleagues.
Although this research is based upon investors in New Zealand pension funds, it corroborates evidence from around the world that peer effects have a strong influence upon our financial choices. US researchers have found that sociable people - those who often visit neighbours' houses or go to church - are "substantially more likely to invest in the stock market than non-social households". Economists at the University of Sheffield have found that British investors are more likely to own shares if they are active members of social groups such as the Womens' Institute, political parties or parents' associations. Hans Hvide at the University of Aberdeen and Per Ostberg of the University of Zurich have found that Norwegians' share purchases are strongly influenced by those of their co-workers. And there's evidence from both the US and the Netherlands that households' spending decisions are shaped by their neighbours' choices.
There is, therefore, strong evidence that some of the biggest financial choices we make - how much to save, whether to buy a car, what to invest in - are influenced by peer pressure. To the extent that individuals' circumstances and objectives differ from those of their friends and neighbours, this runs the danger that many of us are misled into making sub-optimal decisions.
It would be easy to infer from this that we should advise people: "You don't need to follow anybody; you've got to think for yourselves." Heeding this advice, however, is difficult.
