Academic journal article Financial Services Review

Do Financial Networks Matter in Retirement Investment Decisions? Evidence from Generation Yers

Academic journal article Financial Services Review

Do Financial Networks Matter in Retirement Investment Decisions? Evidence from Generation Yers

Article excerpt

Abstract

Using experimental survey data collected from a sample of Generation Yers, we examine the joint influence of financial literacy and financial networks on individual retirement investment decisions. We find, first, that financial literacy and financial network intensity (the network strength with the financially literate) are positively related to stock allocation. Second, the positive relationship between financial literacy and stock allocation, however, is significant only among those having high financial network intensity. This finding suggests that the positive effects of financial literacy documented in the literature can be limited to only those who have strong networks with the financially literate. © 2015 Academy of Financial Services. All rights reserved.

Jel classification: G11; J26

Keywords: Retirement investment decisions; Financial networks; Financial literacy

(ProQuest: ... denotes formulae omitted.)

1. Introduction

While the financial environment becomes complex and volatile, individual financial decision-making has been considered an important factor of determining an individual's financial well-being. Thus, a large body of research has investigated what factors influence financial decision-making and has found that financial literacy is a key determinant in many areas such as money management, credit, investment, and retirement planning (e.g., Campbell, 2006; Lusardi & Tufano, 2009; Moore, 2003; Perry & Morris, 2005). However, financial literacy alone may not be able to improve financial behaviors substantially (e.g., Fernandes, Lynch, & Netemeyer, 2014; Kiviat & Morduch, 2012).1 Because of the fast-changing financial product offerings and industry environment, acquiring and processing up-to-date financial knowledge and information is quite challenging even to those who are financially literate (Willis, 2011). Consequently, individual investors often rely on other people to make investment decisions, instead of solely on their own knowledge.

Relatively recently, research on financial decision-making has begun to recognize the importance of social interactions in individual investment decisions. Because individual investors may be able to reduce time and effort to acquire financial knowledge and information through social interactions with others, "social" people are more likely to participate in financial markets than others who do not engage in social interactions (Brown, Ivkovic', Smith, & Weisbenner, 2008; Duflo & Saez, 2002; Hong, Kubik, & Stein, 2004; Ivkovic'& Weisbenner, 2007; Kaustia & Knupfer, 2012; Lu, 2011). In line with this argument, research on social networks in management finds that individuals may acquire a high volume of and diverse work-related knowledge and information through frequent communication with co-workers or experts who have task-related knowledge (Hansen, Mors, & Lovas, 2005; McFadyen & Cannella, 2004; Reinholt, Pedersen, & Foss, 2011; Wang & Noe, 2010). Because tacit and confidential knowledge tend to be shared only with whom people trust (Nahapiet & Goshal, 1998; Yli-Renko, Autio, & Sapienza, 2001) and transferred through strong network ties (Chung & Jackson, 2013; Hansen, Podolny, & Pfeffer, 2001), strong connections with people who are financially literate may facilitate individuals to obtain reliable and opportune information for investments without excessive time and effort.

Drawing on the literature on financial literacy and social networks, we propose that an individual investor's decision-making may be affected by not only his or her financial knowledge but also social networks. Among various types of social networks (e.g., career advice networks and task information networks), we focus on individuals' social networks for acquiring financial or investment information, which are dubbed "financial networks." While prior studies focused on social activities, few studies examined how social networks influence investment decisions. …

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