Having the ‘right’ friends may hold the secret to building wealth, according to new study on socioeconomic ties
- Written by Brad Cannon, Assistant Professor of Finance, Binghamton University, State University of New York
Having wealthy people in your social network significantly boosts the likelihood that you’ll participate in stock markets and savings plans, according to a new working paper I co-authored.
My colleagues and I recently conducted research[1] on social finance to understand the ways in which social networks affect stock market participation and savings behavior. This is important because a substantial fraction of households in the U.S., particularly lower-income families, do not own stocks[2].
Given that the total return to the U.S. stock market from 1980 through September 2024 has been over 12,000% – for example, US$1,000 invested in the S&P 500[3] in 1980 would be worth $121,350 today – this creates a disparity in wealth for those who participate relative to those who do not. Understanding why some people invest and others don’t is important for addressing social concerns such as rising inequality.
In our study, we looked at social capital[4], which is a measure of the value that comes from being in a group or having dense social networks. Researchers have found that social capital can have positive impacts on individuals and communities, spurring innovation, economic prosperity[5] and better health outcomes. We used friendship data from Facebook to measure different aspects of social networks by county in the U.S. We combined this data with tax information from the Internal Revenue Service about investments and savings.
We found that in counties where friendships with prosperous individuals are more common, investment and savings tend to be higher. Moreover, we found that having these friendships with wealthy individuals plays a more important role in shaping financial behaviors than two other aspects of social capital we looked at in our study: having a tight group of friends and living in a community with strong civic engagement.
Of course, making wealthy friends alone does not guarantee you’ll invest or save more. But perhaps knowing people who invest makes it less daunting and fraught, particularly if those friends can serve as a resource and sounding board.
“Friends with Benefits: Social Capital and Household Financial Behavior” was co-authored by David Hirshleifer[6] and Joshua Thornton[7].
References
- ^ recently conducted research (www.nber.org)
- ^ lower-income families, do not own stocks (www.axios.com)
- ^ invested in the S&P 500 (ofdollarsanddata.com)
- ^ social capital (academic.oup.com)
- ^ economic prosperity (www.nature.com)
- ^ David Hirshleifer (www.marshall.usc.edu)
- ^ Joshua Thornton (hankamer.baylor.edu)
Authors: Brad Cannon, Assistant Professor of Finance, Binghamton University, State University of New York
