HISTORY vs. GEOGRAPHY: THE ROLE OF COLLEGE INTERACTION IN PORTFOLIO CHOICE

We study the link between social interaction and portfolio choice. We concentrate on a form of interaction that is rooted back in the past: college-based interaction — defined as the one that relates the portfolio choice of an investor to that of the other investors who went to the same college. We explain it in terms of a common cultural imprinting and the development of long-term friendship and alumni networks and we directly quantify its impact on portfolio choice. We compare college-based interaction to other forms of social interaction, such as professional and geographical interaction, properly controlling for the standard motivations of portfolio theory, such as hedging of non-financial income risk, familiarity, wealth and income effect, a host of demographic, geographic and professional dummies, trend-chasing and momentum behavior. All the different sources of social interaction significantly affect stock-picking both statistically and economically. College-based interaction is, however, in general stronger than the other sources of social interaction and has an explanatory power higher than the standard determinants of portfolio choice, such as hedging nonfinancial income risk, familiarity and so on. The impact of college-based interaction is statistically and economically significant. Investors invest in the same stocks in which their former classmates do and skew their portfolios towards growth stocks if their former classmates do the same. Moreover, investors are more likely to herd with the other investors who went to the same college than with the rest of the population. College-based interaction also affects investors’ decision to concentrate their portfolios in few stocks. JEL : G11, G14.