Peer effects on decision making in complex financial situations

• Published in: Economic modelling Vol. 127; p. 106477
• Main Authors: Das, Tanmoy, Banerjee, Priyodorshi
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.10.2023
• Subjects: Bounded rationality; Complex decision problems; Financial decision making; Naïve observational social learning; Peer effects; Financial decision making; Peer effects; D12; O17; Complex decision problems; G02; C91; Naïve observational social learning; Bounded rationality
• ISSN: 0264-9993
• DOI: 10.1016/j.econmod.2023.106477

Complex financial decisions such as portfolio allocation often have to be made. Increased complexity may raise the difficulty of reaching decisions or lower confidence in own decision-making, and this leads to social learning through greater reliance on the observed decisions of peers. We investigate this relationship through an artefactual field experiment. Subjects make the same portfolio allocation decision twice, the second time after unexpectedly observing the choice of a peer. Activity related to revision of prior choice provides a measure of peer effects. We manipulate complexity of the allocation problem between subjects and find that increased complexity heightens revision activity. We contribute to the literature analyzing the sources of peer effects on financial decisions. Our novelty lies in introducing the notion of decision complexity in this arena and showing that changes in the level of complexity might affect the degree of peer effects, in addition to social influence on individual decisions. •We introduce complexity as a factor affecting social influence on individual decision.•Reliance on choices of peers can increase when making more complex financial choices.•In a field experiment, subjects could revise prior choice upon observing peer choice.•Peer effects measured by revision rate increased with complexity of choice problem.•The finding supports theories of peer effects based on naïve social learning.