Looking for a stock tip? For many people that advice is asclose as your next door neighbor or the woman on the next treadmill.
Research conducted by Scott Weisbenner, associate professor of finance and Julian Simon Memorial Faculty Fellow, indicates that, when it comes to making choices in your portfolio, word of mouth plays a big role. “In communities where word of mouth is strong for selection of brands, word-of-mouth communications is typically strong across the board, including for investment decisions,” says Weisbenner.
And his data backs that up. The study used a database of stock portfolio information for 35,000 clients of a large discount brokerage firm from 1991 through 1996. The clients remained anonymous; however, zipcode information was provided, which allowed the researchers to evaluate whether investors were more likely to choose a stock that was also favored by their neighbors.
The neighborly preference is particularly true for local stocks, with people investing up to one-third of their portfolio in nearby firms. “This local bias can be due to three factors,” says Weisbenner. “Simple familiarity with the firm, access to locally available information, and word-of-mouth communication with neighbors. You can get information on local companies through your neighbors who work there or are otherwise connected.”