Stories | May 12, 2015

How your peers can help you stay afloat

Influences from other people can have a powerful effect, and may make or break your bank balance.

It is tempting to go with the flow when we work, play and learn from each other – but are we following the right leads from our friends and relatives? Peer pressure is something we associate with teenagers. Unfortunately, however, our peers affect what we do at all ages – and this is just as true when it comes to money decisions.

A 2012 study found venture capitalists who chose to collaborate with fellow graduates that invested wisely actually made better investment choices themselves. Conversely, those who opted to buddy up with the same ethnic group instead did worse – an example of how the wrong peers can have a negative effect.

Do what I do
People who are like us can help or hinder us in our emotions and decision making. A 2014 investigation showed peer effects can even alter long-term savings decisions. This survey investigated the results of a law change giving people in Israel the option to move to a multitude of other pension funds, or stay with their employer’s pension plan.

A vast majority (93%) of the 10,723 employees studied chose to remain with their company savings programme, as present bias and inertia might suggest. But among those who did switch, many chose funds that offered worse terms than the old one. “By far the most popular fund chosen by those employees who switched did not stand out in terms of performance, transaction costs, or services,” researchers Yevgeny Mugerman, Orly Sade and Moses Shayo wrote.

Individuals appear to be strongly influenced by their peers, who are not necessarily experts in the subject matter.

“Indeed, individuals seem to be more strongly influenced by those peers who happen to share their ethnic background.”

Wherever you go
People who are near us are also likely to influence us. You may be more likely to buy something if you simply see others doing so, and we can be affected by people we don’t even know if we become aware of their choices. Another 2014 survey found that passengers were 30% more likely to make a purchase on a particular flight if someone sitting nearby did. As more people bought something, the effect increased.

Researchers have also discovered that villagers in an Indian micro-finance programme were more likely to keep up with their loan repayments if they knew other borrowers were doing so – and they might default as well if the others stopped paying. This was true even when the borrowers were not jointly liable in any way for each other’s debts.

In a different experiment, simply sending text messages – without any group meetings or other peer pressure – with information on what others were achieving saw savings triple among 2,687 micro-entrepreneurs in Chile.

Shining knights and widows’ mites
We are all influenced by others, but sometimes in different ways. Research suggests charitable giving is influenced by the amount of previous donations – not just because we copy others, but because we want to be perceived a certain way.

“We find positive and sizeable peer effects: a £10 increase in the mean of past donations increases giving by £2.50, on average,” wrote Sarah Smith, Frank Windmeijer and Edmund Wright in the 2014 paper. “The amount given is affected both by ‘shining knights’ (very large donations) and by ‘widows’ mites’ (very small donations), as well as there being ‘herd behaviour’.”

People who want to fit in may try to give an average amount. Those who wish to appear benevolent, on the other hand, may try to give more than everyone else, the researchers found.

This is like anchoring – where seeing a higher-priced item among other choices can get us spending more. When our peers share a similar point of view, we also may not challenge ourselves to think about alternatives – a thinking trap known as confirmation bias.

Sink or swim alone?
Aside from becoming hermits, we probably cannot protect ourselves completely from others’ influence. However, adopting simple rules for our finances may reduce the effects: stick to a budget to avoid unnecessary spending, diversify any investments and choose offerings with lower fees where possible.

Do not forget the potential for positive peer effects. Team up with those you admire: it might well pay off.

eZonomics team
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Personal financeBiasFamilyBehaviourPeer effects