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

Timothy (Jun) Lu

Abstract — This paper explores whether social interactions influence investors’ decisions to hold equity and allocate their portfolios, in the context of defined contribution retirement savings accounts. Using a rich dataset of 401(k) plans, we provide empirical evidence that participants are influenced by their coworkers when they make equity investment decisions. Specifically, we show that individuals are likely to increase their risky share if their peers earned higher equity returns in the past period relative to average returns; they are also likely to decrease their risky share when past peer equity returns are strongly negative. These results are consistent with the limited attention hypothesis that people are more likely to pay attention to significant outcomes.