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

Using a high-stakes field experiment conducted with a financial brokerage, we implement a novel design to separately identify two channels of social influence in financial decisions, both widely studied theoretically. When someone purchases an asset, his peers may also want to purchase it, both because they learn from his choice (“social learning”) and because his possession of the asset directly affects others’ utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing his ability to possess the asset. Then, we randomize whether the second member of the pair: (1) receives no information about the first member, or (2) is informed of the first member’s desire to purchase the asset and the result of the randomization that determined possession. This allows us to estimate the effects of learning plus possession, and learning alone, relative to a (no information) control group. We find that 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; and, they report motivations consistent with “keeping up with the Joneses” when learning about their peer’s possession of the asset. These results can help shed light on the mechanisms underlying herding behavior in financial markets and peer effects in consumption and investment decisions. JEL Codes: C93, D03, D14, D83, G02, M31 ∗We would like to thank Sushil Bikhchandani, Aislinn Bohren, Arun Chandrasekhar, Shawn Cole, Rui de Figueiredo, Fred Finan, Uri Gneezy, Dean Karlan, Navin Kartik, Larry Katz, Peter Koudijs, Kory Kroft, Nicola Lacetera, David Laibson, Edward Leamer, Phil Leslie, Annamaria Lusardi, Kristof Madarasz, Gustavo Manso, Ted Miguel, Kris Mitchener, Adair Morse, Paul Niehaus, Andrew Oswald, Yona Rubinstein, Andrei Shleifer, Ivo Welch, as well as seminar participants at Berkeley, Columbia, FGV-SP, Frankfurt, GWU, HBS, LSE, MIT, Munich, NYU, PUC-Rio, UCLA, UCSD, SEEDEC, Simon Fraser, SITE, Stanford, Vienna, Yale, Yonsei and Zurich for helpful comments and suggestions. Juliana Portella provided excellent research assistance. We also thank the Garwood Center for Corporate Innovation, the Russell Sage Foundation and UCLA CIBER for financial support. Finally, we thank the management and staff of the cooperating brokerage firm for their efforts during the implementation of the study. There was no financial conflict of interest in the implementation of the study; no author was compensated by the partner brokerage or by any other entity for the production of this article. †UCLA Anderson and NBER, bursztyn@ucla.edu. ‡Yale School of Management, florian.ederer@yale.edu. §São Paulo School of Economics FGV, bruno.ferman@fgv.br. ¶UC Berkeley Haas and NBER, yuchtman@haas.berkeley.edu.