The Impact of Peer Performance on Individual Investors’ Risk-Taking

This working paper is written by Nina Klocke (Paderborn University), Daniel Muller (Paderborn University), Tim Hasso (Bond University) and Matthias Pelster (Paderborn University).This paper studies the impact of social interactions on investors’ trading behaviour and risk-taking. We analyse a large sample of trading records from a social trading brokerage service that allows its investors to interact with their peers in a social media-like setting. These records present a unique opportunity to investigate how individuals’ trading activities and risk-taking change with respect to the outcomes of their peers. We show that investors’ risk-taking increases as a result of their peers’ trading performance. We exploit plausibly unexpected shocks to peers’ performance to address the endogeneity concern inherent in the analysis of peer effects