The choices that people make in their lives, especially about what to eat, to buy, whom to meet, what to watch, etc, to a large extent, are made due to social media. And what is social media really, if not peer influence? Some would call it peer pressure. The segment of investment isn’t far away from this phenomenon, especially as you’ll find in the stock market today. You’ve doubtless heard of the good old “hot stock pick”. That’s a peer influencing you to buy a particular stock. It may seem like a gentle nudge, but it’s plain peer pressure.
In 2014, a study by Florian Ederer very aptly elucidated how individuals’ financial decisions are swayed by social media. In other words, how other individuals influence us through channels of social media and thus, peer pressure. According to Ederer, there exist two channels of influence - one is “social learning” and the other, “social utility”. Whether it is to do with online trading, or any other financial decision, these two channels of influence determine how peers may have a say on how we behave while making financial decisions.
One of the channels, the social learning channel, is purely observational. If you hear that your friend wishes to buy a specific asset, it makes you think of the asset as a high quality one, because you implicitly trust your friend’s judgement. Consequently, you end up buying the asset. Similarly, if you think highly of your friend who suggests you open a Demat account, you’ll go right ahead.
The other channel, that of social utility, on the other hand, is what you commonly refer to as ‘keeping up with the Joneses.’ If your friend purchases an asset, you may not focus on the quality of the asset per se. However, you may worry that your peer possesses the asset and you don’t. You are concerned about lagging behind with regard to wealth. If the value of the asset shoots up, you think of the fact that your friend will be richer and you will be poorer. That makes you feel less of a person compared to your friend and ultimately, you buy the asset. This is the case when you see your friend engage in online trading, and rush to do the same. If your friend’s behaviour lowers your self-esteem, this can be a huge factor to make you model your friend’s behaviour.
When you think of peer pressure, it's no surprise that the choices of peers and friends look a lot like your own. In the field of behavioural finance, the effects of peer influence have been studied in different categories. Especially where investment decisions are concerned, people tend to rely more and more on their peers and their choices, rather than their own. Although the broad reasons for following peer behaviour have been mentioned through the Ederer study, there are some aspects of peer pressure to note:
Whether you wish to invest your wealth in fixed instruments or different asset classes, there is a varied range of investments out there. The segment of investments is filled with options that suit the requirements of any individual and their goals. Hence, if you wish to make wise investment choices, you have to consider the following:
If you are about to open a Demat account and are looking forward to investment in the stock market today, you should evaluate the companies whose stock you may want to invest in. Similarly, you may be looking at fixed income instruments to play it safe. You should check out interest rates and select the investment product that suits your needs. Also, you should assess your goals, not just in terms of the returns you want, but also whether you want gains in the short or long term. Instead of a peer, you would rather put your faith in a broker who is an expert in the investment arena, Motilal Oswal
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