Working Paper: CEPR ID: DP15556
Authors: Theresa Kuchler; Johannes Stroebel
Abstract: We review an empirical literature that studies the role of social interactions in driving economic and financial decision making. We first summarize recent work that documents an important role of social interactions in explaining household decisions in housing and mortgage markets. This evidence shows, for example, that there are large peer effects in mortgage refinancing decisions and that individuals' beliefs about the attractiveness of housing market investments are affected by the recent house price experiences of their friends. We also summarize the evidence that social interactions affect the stock market investments of both retail and professional investors as well as household financial decisions such as retirement savings, borrowing, and default. Along the way, we describe a number of easily accessible recent data sets for the study of social interactions in finance, including the "Social Connectedness Index,'' which measures the frequency of Facebook friendship links across geographic regions. We conclude by outlining several promising directions for further research in the field of "social finance.''
Keywords: social networks; peer effects; financial decision making; social dynamics; belief contagion
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Social interactions (Z13) | Household decisions in housing and mortgage markets (R21) |
| Peer refinancing activity (G51) | Teacher's likelihood of refinancing (G51) |
| Friends' experiences (C92) | Individuals' beliefs about housing market investments (G59) |
| Friends' house price growth (R21) | Likelihood of transitioning from renting to homeownership (R21) |
| Friends' house price growth (R21) | Size of purchased property (R33) |
| Peer default behavior (C92) | Individual default probabilities (D80) |
| Knowing someone who defaulted (G33) | Perceived risk of defaulting oneself (G33) |