Peer Pressure: Social Interaction and the Disposition Effect

Heimer, Rawley Z.

doi:10.1093/rfs/hhw063

Review of Financial Studies 29 (11): 3177–3209

Peer Pressure: Social Interaction and the Disposition Effect

Rawley Z. Heimer

Abstract. Social interaction contributes to some traders’ disposition effect. New data from an investment-specific social network linked to individual-level trading records builds evidence of this connection. To credibly estimate causal peer effects, I exploit the staggered entry of retail brokerages into partnerships with the social trading web platform and compare trader activity before and after exposure to these new social conditions. Access to the social network nearly doubles the magnitude of a trader’s disposition effect. Traders connected in the network develop correlated levels of the disposition effect, a finding that can be replicated using workhorse data from a large discount brokerage.

Keywords: disposition effect, peer effects, social interaction, social trading networks, retail traders, behavioral finance.

In brief

Social interaction makes investors more prone to the disposition effect — selling winning positions too soon and holding on to losers.

Using an investment-focused social network linked to individual trading records, and exploiting the staggered timing with which brokerages partnered with the platform, the paper finds that gaining access to the network nearly doubles a trader’s disposition effect. Traders who are connected in the network develop similar levels of the bias, a pattern that also shows up in standard data from a large discount brokerage.

**Table 1.** Study at a glance
Panel A. Design
Question	Does social interaction make investors more prone to the disposition effect?
Setting	An investment-specific social network linked to individual trading records
Data	Social network activity and trading records; data from a large discount brokerage
Method	Staggered entry of retail brokerages into partnerships with the social trading platform
Panel B. Main findings
Disposition effect after network access	Nearly doubles
Traders connected in the network	Develop correlated levels of the bias

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

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Published version, Review of Financial Studies
Working paper version, SSRN
DOI: 10.1093/rfs/hhw063

Heimer, Rawley Z.. 2016. “Peer Pressure: Social Interaction and the Disposition Effect.” Review of Financial Studies 29 (11): 3177–3209. https://doi.org/10.1093/rfs/hhw063.

@article{heimer2016peer,
  author  = {Heimer, Rawley Z.},
  title   = {Peer Pressure: Social Interaction and the Disposition Effect},
  journal = {Review of Financial Studies},
  volume  = {29},
  number  = {11},
  pages   = {3177--3209},
  year    = {2016},
  doi     = {10.1093/rfs/hhw063},
  url     = {https://academic.oup.com/rfs/article/29/11/3177/2583763}
}

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?; Friends Do Let Friends Buy Stocks Actively

In brief

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