Social Influence and Peer Effects in Financial Decision-Making PDF

SOCIAL INFLUENCE AND PEER EFFECTS IN FINANCIAL DECISION- MAKING Understanding the Impact of Peer Dynamics in Investment Choices Melicil L. Palada, LPT, MAM, CFMP Instructor WHAT IS SOC...

SOCIAL INFLUENCE AND PEER EFFECTS IN FINANCIAL DECISION- MAKING Understanding the Impact of Peer Dynamics in Investment Choices Melicil L. Palada, LPT, MAM, CFMP Instructor WHAT IS SOCIAL INFLUENCE? Social influence refers to the way individuals adjust their thoughts, feelings, and behaviors based on the actions and opinions of their peers. In financial markets, this can manifest as investors making buying or selling decisions primarily influenced by what others are doing, rather than based on their own analysis or understanding of market conditions. Two Primary Mechanisms of Social Influence Informational Social Influence Normative Social Influence  Two Primary Mechanisms of Social Influence Informational Social Normative Social Influence Influence Informational social Normative social influence occurs when individuals look to others for influence arises from the guidance in uncertain desire to be accepted and liked situations, believing that the by others. Individuals may information others provide can conform to the expectations or help them make better behaviors of a group to gain decisions. This is particularly social approval or avoid relevant in scenarios where rejection, even if they do not individuals lack complete personally agree with those information or expertise. behaviors.  Two Primary Mechanisms of Social Influence Informational Social Normative Social Influence Influence Key Characteristics Key Characteristics  Individuals conform  Conformity occurs to fit in because they genuinely or adhere to group norms, believe others possess regardless of the accuracy more accurate information or rationality of the group’s or insights. behavior.  This mechanism is often  This mechanism is strongest in ambiguous powerful in cohesive situations where the groups where social bonds correct course of action is are strong. unclear. Peer Effects in Financial Markets This concept refers to the influence that individuals have on one another, particularly within a social or community context. In investing, this can manifest as decisions being swayed by friends, colleagues, or trends observed in the market. Examples of Peer Effects in Financial Markets Suppose an investor sees their friends or colleagues buying shares of a particular tech company. Even if they have doubts about the company's fundamentals or recent performance, they might decide to invest simply because they want to be part of the group. This phenomenon often leads to herd behavior, where the rush to buy creates an inflated stock price that may not reflect the company’s true value. Implications of Peer Effects Irrational Decision-Making: Bull markets drive aggressive buys; bear markets trigger panic sells. Market Volatility: Collective buying/selling based on peer actions drives volatility. Real-World Examples of Social Influence Case Studies:  Dot-Com Bubble (late 1990s - early 2000s): Investors rushed to invest in internet-based companies, driven by the excitement of rapid technological advancement and seeing others profiting, leading to unsustainable valuations and eventual market crash.  Cryptocurrency Surge (2017): The dramatic rise in cryptocurrency prices was fueled by widespread media coverage and social media hype, prompting many inexperienced investors to enter the market, often based on peer influence rather than solid understanding. Social Media's Role in Peer Influence Enhanced Influence: Instant updates and trending opinions amplify herd behavior. Mitigating Influence: Diverse views and critical discussions on social platforms can encourage informed decisions. Mitigating Social Influence in Investing Strategies to Reduce Social Influence: Conduct independent research. Set clear investment goals. Use data-driven decision-making. Cultivate a critical mindset. Seek professional advice. THANK YOU!  Requirements: Make a mini research project on "Social Influence and Peer Effects in Financial Decision-Making," Form groups of 5 students. You are free to choose your own group members. Select a topic that is feasible for a mini research project. The topic should be relevant, manageable, and specific enough to complete within the timeframe given. Project Timeline:  Submit the selected topic for approval by Nov. 18-20, 2024.  Submit a preliminary outline with a brief description of the problem, objectives, and proposed methodology by Nov. 29, 2024.  Final report submission: December 13, 2024. Project Deliverables:  Written Report: Follow the mini research format (approximately 5- 7 pages).  Presentation: Each group will present their findings in a 10-minute presentation, with each member contributing to the discussion. Mini Research Report Format Title Page: Title, group members' names, institution, and date. Abstract: 100-150 words summarizing the research. Introduction: Background, problem statement, research objectives, and significance of the study. Literature Review: Summary of related studies or concepts. Methodology: Research design, participants, data collection, and analysis methods. Findings/Results: Summarized findings with tables, graphs, or other visuals. Discussion: Interpretation of the findings, comparisons with existing literature, and implications. Conclusion: Summary, limitations, and suggestions for future research. References: List of all sources cited in your research.