How Employees Rely on Coworkers When it Comes to Investing
We’ve all heard of FOMO, fear of missing out, when it comes to social settings. But for people in the workplace, it turns out that they might be feeling the same when hearing about investment decisions, according to new research from Maryland Smith.
Within a company, employee stock purchase plans (ESPP) offer employees an opportunity to purchase shares of the company’s stock at a discount from current market prices through their salary.
And though it might seem like an enticing opportunity, participation in these plans is relatively low – around 25% to 40%, says Maryland Smith’s Geoffrey Tate. That percentage increases, however, when employees learn that their colleagues are buying in. And that’s just the beginning of the peer effect.
“A lot of the existing evidence suggests that peer effects are blind mimicry,” says Tate, Dean’s Professor of Finance at the University of Maryland’s Robert H. Smith School of Business. “People will make portfolio decisions that are correlated with their peers’ portfolio decisions, but in ways that don't necessarily make them better off.”
The research, written with coauthor Paige Ouimet from the University of North Carolina and published in The Journal of Finance, leverages data from more than 500 U.S. firms to test for peer influence on participation and trading decisions in employer-sponsored plans.
Based on the data, younger employees – men, in particular – were more susceptible to peer influence, Tate says. Within organizations, high information employees, or those who seem knowledgeable with regard to financial decision making, help disseminate information through peer networks.
“Peer effects are much stronger in settings where there’s at least one employee in the office who actually has financial knowledge,” says Tate. “This is consistent with people recognizing and trying to learn from their peers. They're much less likely to mimic if they don't think there's somebody around who's worth mimicking.”
A challenge to identifying the influence of peers on choices is that groups of peers could make similar choices simply because they have similar preferences or are exposed to similar shocks. To sidestep this problem, the research measures the peer effects using only variation across workers who work in the same firm at the same time, but in different offices, while also correcting for correlation of decisions among workers in the same metro areas, Tate explains. It also exploits predictable variation in participation and trading choices across offices due to differences in worker demographics that is unlikely to correlate with confounding shocks.
“Say in a company’s Maryland office that the average age is 35, but in the North Carolina office, it’s higher. Maybe the Maryland office is made up of 60% women, while the other office it’s only 45%,” says Tate, noting that women are significantly less likely to participate in ESPPs than men. “Just the lower participation among peers predicted by the higher fraction of women in the office can be used to identify the effects of peer choices on participation or trading behavior.”
Those who choose not to participate in ESPPs, Tate says, may be missing out, given that it serves as one of the easiest means to hold stock, and as not jumping in could mean falling further behind.
“Companies should make it a priority to provide information and educate employees on making better decisions in those plans,” he says. “This is potentially a major way to address divergence and income and wealth between disparities between people. And leveraging existing peer networks could be an effective way to do so.”
Read More: “Learning from Coworkers: Peer Effects on Individual Investment Decisions,” published in The Journal of Finance.