Friends Do Let Friends Buy Stocks Actively

Heimer, Rawley Z.

doi:10.1016/j.jebo.2014.04.019

Journal of Economic Behavior and Organization 107 (Part B): 527–540

Friends Do Let Friends Buy Stocks Actively

Rawley Z. Heimer

Abstract. This research is the first to provide empirical evidence that social interaction is more prevalent amongst active rather than passive investors. While previous empirical work, spearheaded by Hong, Kubik, and Stein (2004), shows that proxies for sociability are related to participation in asset markets, the literature is unable to distinguish between the types of participants because of data limitations. I address this shortcoming by using data from the Consumer Expenditure Quarterly Interview Survey on individual holdings, and buying and selling of financial assets as well as expenditure variables which imply variation in the level of social activity. My findings support a new explanation for the active investing puzzle in which informal communication tends to promote active rather than passive strategies (Han and Hirshleifer 2012).

Keywords: active investing puzzle, social interaction, stock market participation, word of mouth, passive investing, Consumer Expenditure Survey.

JEL codes: G02, G11.

In brief

Sociable people are more likely to be active traders than passive investors.

Earlier work linked sociability to stock market participation but could not tell which kinds of investors were more social. Using Consumer Expenditure Survey data on individuals’ asset holdings, trading, and spending patterns that indicate social activity, the paper finds that social interaction is more common among active investors than passive ones. This supports an explanation for the active investing puzzle in which word-of-mouth communication tends to spread active rather than passive strategies.

**Table 1.** Study at a glance
Panel A. Design
Question	Are sociable people more likely to be active or passive investors?
Data	Consumer Expenditure Quarterly Interview Survey: asset holdings, trading, and spending that indicates social activity
Method	Proxies for social activity related to active versus passive investing
Panel B. Main findings
Social interaction	More prevalent among active than passive investors
Implication	Word of mouth tends to spread active rather than passive strategies

Summarized from the paper. See the paper for exact estimates and specifications.

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Published version, Journal of Economic Behavior and Organization
Working paper version, SSRN
Working paper version (open access), Federal Reserve Bank of Cleveland Working Paper 13-14
DOI: 10.1016/j.jebo.2014.04.019

Heimer, Rawley Z.. 2014. “Friends Do Let Friends Buy Stocks Actively.” Journal of Economic Behavior and Organization 107 (Part B): 527–540. https://doi.org/10.1016/j.jebo.2014.04.019.

@article{heimer2014friends,
  author  = {Heimer, Rawley Z.},
  title   = {Friends Do Let Friends Buy Stocks Actively},
  journal = {Journal of Economic Behavior and Organization},
  volume  = {107},
  number  = {Part B},
  pages   = {527--540},
  year    = {2014},
  doi     = {10.1016/j.jebo.2014.04.019},
  url     = {https://www.sciencedirect.com/science/article/pii/S0167268114001243}
}

Topics: Retail investing and brokerage; Behavioral finance and beliefs
Related papers: Dynamic Inconsistency in Risky Choice: Evidence from the Lab and Field; Biased by Choice: How Financial Constraints Can Reduce Financial Mistakes; Should Retail Investors’ Leverage Be Limited?; Peer Pressure: Social Interaction and the Disposition Effect

In brief

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