Friendship and money have often been compared to oil and water: they just don’t mix.
Well, there might be a way around that.
New research involving Assistant Professor Brad Cannon from Binghamton University’s School of Management shows how people with friends who make more money than they do are more likely to save and make smart financial investments themselves.
The study, titled “Friends with Benefits: Social Capital and Household Financial Behavior,” was published by the National Bureau of Economic Research, and it was co-authored by researchers from the University of Southern California’s Marshall School of Business and Baylor University’s Hankamer School of Business.
By combining Facebook data with county-level tax information, researchers sought to better understand how social interactions affect choices regarding personal finances.
“There are plenty of people who have some money saved, but they’re not taking full advantage of it, whether they could be making more in interest or maybe they just don’t know how to make investments of any kind,” Cannon said. “There really needs to be a social connection to help people overcome these obstacles, so the most natural takeaway from this study is that we can benefit from interacting with people who have more financial experience because they can help us improve our financial decision-making.”
The researchers point out that simply having richer friends doesn’t guarantee that a lower-income person will automatically start making better investments, and the study’s findings include the savings decisions of all households (including those of high and low socioeconomic status).
Cannon and his collaborators used data created by other researchers with access to Facebook’s database of 27.2 million users — those social media connections served as a proxy for the relationships people have in their daily lives — and financial information, particularly interest and dividend income from IRS tax returns. Interest and dividend income served as indicators that a person had a bank savings account and owned stocks.
County-based data was also used to examine areas where people could potentially connect with others of higher and lower socioeconomic status compared to counties where there was less potential for such interactions.
The researchers found that for every 10% increase in friends of high socioeconomic status, there was a nearly 3% greater chance of stock-market participation for a person with a lower income and a 5% increase in the chance they saved money.
Cannon said one of the study’s unexpected findings was that being around wealthier people mattered more than friending ability.
For example, he said, a person who joins a tennis club where most of its members are wealthy becomes more likely to make wealthy friends since they’re around more people of high socioeconomic status.
On the other hand, he added, if you’re part of a lacrosse team where there are fewer wealthy members, you could still have many wealthy friends if you’re proactive or strategic in choosing who to be friends with.
“Our results indicate that the former (exposure to wealthier individuals) has a much larger effect on household savings decisions than the latter (proactively making wealthy friends),” Cannon said.
“It is a well-documented fact that Americans, on average, do not have enough saved for retirement. This is likely partially due to low levels of savings and partially due to low levels of stock market participation. Additionally, there is evidence suggesting that wealth inequality is exacerbated when the stock market does well,” said Joshua Thornton, assistant professor of finance at Baylor University, who co-authored the study. ”Our findings suggest that encouraging friendships with wealthy individuals could help Americans to save and invest more.”
“Individual choices, the social environment, or public policies that enhance economic connectedness within the social network may help people achieve greater financial market participation. Such participation is important for upward mobility by providing access to financial opportunities and knowledge,” added David Hirshleifer, professor of finance and business economics at the USC Marshall School of Business, who also co-authored the study. ”Greater financial literacy and greater saving and investment in the stock market are, in general, important for wealth accumulation.”
Pointing to other research, the study cited casual restaurant chains Olive Garden and Applebee’s, as well as publicly funded locations, such as libraries and parks, as examples of places where it could be easy for people of different income brackets to interact.
“So, if you’re thinking about policy,” Cannon said, “this suggests that just creating more opportunities in communities to interact socially with wealthy people or people who have experience investing seems like it could potentially go a long way toward helping those who could benefit from that knowledge to save more.”
