Regional social networks in stock purchases are an emerging field of study, with the phenomenon neatly documented among institutional shareholders. Adjusted for intervening factors, fund managers in a particular geography are more likely to buy (or sell) a stock if others in the same region are buying (or selling) the same stock.
So, you’re likely thinking to yourself, does the same effect hold among neighborly sorts like you and me? According to a fascinating new paper, you bet it does:
We study the relation between households’ stock purchases and stock purchases made by their neighbors. A ten percentage point increase in neighbors’ purchases of stocks from an industry is associated with a two percentage point increase in households’ own purchases of stocks from that industry. The effect is considerably larger for local stocks and among households in more social states.
So, you say, did you control for wealth, sociability, style preferences, etc.? And how big was the resulting effect? Read on:
Controlling for area sociability, households’ and neighbors’ investment style preferences, and the industry composition of local firms, we attribute approximately one-quarter to one-half of the correlation between households’ stock purchases and stock purchases made by their neighbors to word-of-mouth communication.
It turns out people lean over their neighbor’s fence to talk about more things than lawnmowers. Good to know I’m not the only one.