In recent weeks we've learned what we all sort of knew before: our friends influence our eating patterns and can make our weight rise to meet theirs. Meanwhile, two finance professors at the U. of Illinois have been studying the effects of social networks on the stocks that investors buy. (The paper is available on NBER, if you have a subscription. Only the abstract seems to be available on SSRN.) After studying the stocks purchased by 35,673 households between 1991 and 1996, the authors, Zoran Ivkovich and Scott Weisbenner, found that a 10% increase in neighbors' purchases of stock in a particular industry was associated with a 2% increase in stock purchases in the same industry by those living nearby. Although the authors concede that one factor was the purchase of stock in companies headquartered within 50 miles of a household, they state that even accounting for this and other factors, that word-of-mouth stock recommendations accounts for a large percentage of the correlation. (So, yes, if you lived in Austin 10 or 15 years ago, you may have bought Dell stock along with your neighbors but without ever mentioning it to each other, but you may have discussed other, non-local stocks.)
I think this is an interesting finding, but I always wonder how we can assume that people in the same zip code actually talk to each other. I have lots of neighbors, but I don't speak to all of them, and I rarely talk about the stock market! Maybe I did in 1994, though. I even joined an investment club, which was a really silly idea. I could even tell you who on my floor at work had shares in Magellan. (Remember Magellan?) I wonder if neighbors chat more about the stock market at some times than others.
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