Peer effects in financial decision making: Evidence from the U.S. Navy
Veith, Patrick M.
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This paper uses field data derived from U.S. Navy personnel records to estimate the effect of peers on individual financial decision making. Looking specifically at the decision made by active duty Navy personnel when choosing between two different retirement options, I test whether the decision to choose one option over the other is independent of the commands to which they are assigned. The results suggest that this decision is not independent and appears to be negatively correlated with the average choice of one's peers and is significantly affected by environmental factors specific to the command. I estimate peer effects in this decision using an OLS model, which addresses the identification problem and which partially controls for contemporaneous shocks. Initial estimates are positive and significant; however, these estimates become negative when fixed effects for unit and month are added. The negative effect implies that individuals deciding between the two retirement options exhibit a negative reactionary response to the preference of their peers. Additionally, I examine the role of financial literacy in this decision and the interaction between cognitive ability and peer effects. The results suggest that individuals with higher cognitive ability demonstrate a more significant negative reaction to their peers than do members with lower cognitive ability.
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