Russel Sage Foundation

Using a field experiment conducted with a financial brokerage, we attempt to disentangle channels through which a person’s financial decisions affect his peers’. When someone purchases an asset, his peers may also want to purchase it because they learn from his choice (“social learning”) and because his possession of the asset directly affects others’ utility of owning the same asset (“social utility”). We randomize whether one member of a peer pair who chose to purchase an asset has that choice implemented, thus randomizing possession of the asset. Then, we randomize whether the second member of the pair: 1) receives no information about his peer, or 2) is informed of his peer’s desire to purchase the asset and the result of the randomization determining possession. We thus estimate the effects of: (a) learning plus possession, and (b) learning alone, relative to a control group. In the control group, 42% of individuals purchased the asset, increasing to 71% in the “social learning only” group, and to 93% in the “social learning and social utility” group. These results suggest that herding behavior in financial markets may result from social learning, and also from a desire to own the same assets as one’s peers.