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Study finds Americans rely on friends, neighbors for investment advice
Business & Law Editor
Ill. — Keeping
up with the Joneses apparently includes keeping up with their stock
market picks, researchers at the University of Illinois have found.
Zoran Ivkovich and Scott Weisbenner, both professors of finance in
the College of Business, studied the stocks purchased by 35,673 U.S.
households between 1991 and 1996.
They found that social networks played a role in determining what stocks
investors would buy. A 10 percent increase in neighbors’ purchases
of stock in a particular industry was associated with a 2 percent increase
in stock purchases in the same industry by those living nearby.
The findings suggest that Americans rely on friends and neighbors for
investment advice in addition to company annual reports, newspaper
and television coverage and other sources of information.
This differed from the investment habits of other countries. In China,
for example, investment choices were largely driven by a “herd” reaction
to locally available news, according to academic research, while investors
in Finland were swayed by such concerns as the ethnic origin of a company’s
The “neighborhood effect” in picking stocks in America
was especially strong for companies headquartered within 50 miles of
a household. “Not only do investors tend disproportionately to
invest locally, but there are also strong information diffusion effects
in their neighborhood,” Ivkovich and Weisbenner wrote.
Another variable factor was population density. In large metropolitan
areas, investors more readily followed their neighbors’ investment
choices. Closer physical proximity and more extensive social networks
encourage a freer exchange of ideas and tips on investments.
Illinois researchers examined stocks purchased through a discount
brokerage on the New York Stock Exchange, American Stock & Options
Exchange (AMEX) and National Association of Securities Dealers Automated
Looking at 23 quarters between 1991 and 1996, Ivkovich and Weisbenner
compiled a database of more than 2.6 million stock purchases in 14
industry groups, including oil and gas, medicine and biotechnology,
finance, transportation and utilities.
Their working paper is titled “Information Diffusion Effects
in Individual Investors’ Common Stock Purchases: Covet Thy Neighbors’ Investment