Blogs | October 12, 2009

Beware your neighbour

Many of us pay attention to what all those near us do, every day, in trivial ways, often without realising it. Chris Dillow tells how peer effects can affect personal finance.


In the British comedy film Monty Python’s Life of Brian, Brian tells his crowd of followers: “You’ve got to think for yourselves. You’re all individuals”. The crowd reply in unison: “Yes, we are all individuals.” Years on, it's becoming increasingly clear that our behaviour is shaped by the people around us. The power of peer pressure influences a huge amount in our lives, from our spending decisions to how hard we work and even how well we did at school.

Really want to keep up with the Joneses?
Take, for example, the decision to buy a new car. This depends not just on a person's own income, but their neighbours too. Dutch researchers discovered this by studying the effects of the nation's postcode lottery. They found that if someone won a new car, their neighbours were more likely to buy a new car.

And the effect is big. Having a neighbour win a car has the same effect upon the decision to get a new car as a €10,000 windfall. The old adage is true. We really do spend money to "keep up with the Joneses".

How else does peer pressure effect our decisions?
It's not just spending that is influenced by peer effects. So too is our work effort. Studies of American supermarket workers and of Eastern European fruit-pickers in England have found the same thing – that people work harder if their friends do.

Sadly, though our friends can lead us astray as well. Research in the US has confirmed what every parent knows – that teenagers whose friends take drugs or commit crime are more likely to do so themselves. This peer pressure is not confined to impressionable youngsters, though.

Baseball players who played alongside Jose Canseco, who notoriously admitted to taking steroids, enjoyed a suspiciously large improvement in their performance, which suggests that even grown men are swayed by the behaviour of those around them.

Can we get by with a little help from our friends?
It is in education, though, that peer effects have been most researched. Here too, they seem strong. Stanford University's Caroline Hoxby has estimated that a one point improvement in a child's classmate's reading scores raises a student's own score by up to 0.4 points, even controlling for the obvious things that might cause both to rise.

The effects aren't confined to younger children, as Dartmouth College's Bruce Sacerdote has found. He examined the way college students tend to associate with like-minded people despite the fact that first-year students at his college are randomly assigned to share rooms. Moreover, Sacerdote found that students who are assigned to high-performing room-mates do better academically themselves.

So important are peer effects that American author Judith Harris has argued that they matter more than parents for a child's development. You might think this means you should move to a good area, so you can your children into a good school where they'll mix with well-behaved, studious children.

But there is also a problem with all this – given what we've seen about the power of peer pressure. If you move to a nice area, you might find yourself spending more money not just on your expensive house, but to keep up with your rich neighbours. It could end up costing you more than you think.

EconomicsShoppingHousingSociety

Chris Dillow
Chris Dillow

Investors Chronicle writer and economist

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