Social Interaction Effects and Individual Portfolio Choice: Evidence from 401(k) Pension Plan Investors

We provide empirical evidence that investors are influenced by their coworkers when they make equity investment decisions. Using a rich dataset of 401(k) plans, we show that individuals are likely to increase (decrease) their risky share when they have lower (higher) equity exposure than their coworkers in the past period. The effect is especially strong when the difference of equity exposure is substantial. Furthermore, they are likely to increase equity exposure if they earned lower equity returns than their peers in the past period. However, when their returns on equity were higher than their peers, they tend not to decrease their risky share. Interaction of peer behavior and peer outcome influences investment decisions, inducing individuals with substantially lower equity exposure relative to peers increase more of risky share when peers also earned higher returns. Heterogeneity exists in short-term excess return, suggesting that peer effects may have different impact on different types of followers.