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Want to earn more money? Start by spending time with the right friends, new research shows
Friendship and money have often been compared to oil and water: they just don’t mix.
Well, there might be a way around this.
New research involving Assistant Professor Brad Cannon from Binghamton University School of Administration shows how people with friends who make more money than themselves are more likely to save and make smart financial investments.
The study, titled “Friends with Benefits: Social Capital and Household Financial Behavior,” was published by National Bureau of Economic Researchand was co-authored by researchers at 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 personal finance choices.
“There are a lot of people who have some money saved but aren’t making the most of it, either because they could be earning 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 conclusion from this study is that we can benefit from interacting with people who have more financial experience because they can help us improve our decision making financial. ”
The researchers point out that simply having richer friends does not guarantee that a person with lower income will automatically start making better investments, and the study’s findings include the savings decisions of all households (including those with high socioeconomic status). is low).
Binghamton University School of Business assistant professor Brad Cannon teaches a finance course in September 2023. Image credit: Jonathan Cohen.
Binghamton University School of Business assistant professor Brad Cannon teaches a finance course in September 2023. Image credit: Jonathan Cohen.
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Cannon and his collaborators used data created by other researchers with access to Facebook’s database of 27.2 million users – these social media connections served as a proxy for the relationships people have in their daily lives – and financial information , especially 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 the number of friends of high socioeconomic status, there was a nearly 3% greater likelihood of stock market participation for a person with lower income and a 5% increase in the likelihood of saving. money.
Cannon said one of the study’s unexpected findings was that being around wealthier people was more important than the ability to make friends.
For example, he said, a person who joins a tennis club where the majority of its members are rich becomes more likely to make rich friends, since they are surrounded by more people of high socioeconomic status.
On the other hand, he added, if you are on a lacrosse team where there are fewer wealthy members, you can still have many wealthy friends if you are proactive or strategic in choosing who to be friends with.
“Our results indicate that the former (exposure to wealthier individuals) has a much greater effect on household savings decisions than the latter (proactively making rich friends),” Cannon said.
“It is a well-documented fact that Americans, on average, do not have enough savings for retirement. This is probably due in part to low levels of savings and in part to low levels of stock market participation. Furthermore, there is evidence to suggest that wealth inequality is exacerbated when the stock market does well,” he said. Joshua Thorntonassistant professor of finance at Baylor University, who co-authored the study. ”Our findings suggest that encouraging friendships with wealthy individuals could help Americans save and invest more.”
“Individual choices, the social environment or public policies that improve economic connection within the social network can help people achieve greater participation in the financial market. This participation is important for upward mobility, providing access to financial opportunities and knowledge,” she added. David Hirshleiferprofessor of finance and business economics at the USC Marshall School of Business, who also co-authored the study. ”Greater financial literacy and greater savings and investment in the stock market are generally important for wealth accumulation.”
Pointing to other research, the study cited casual restaurant chains Olive Garden and Applebee’s, as well as publicly funded places like libraries and parks, as examples of places where people of different income brackets could easily interact.
“So if you’re thinking about policy,” Cannon said, “this suggests that just creating more opportunities in communities to interact socially with people who are wealthy or have investment experience seems like it could really help those who could benefit from that knowledge to save more. .”