Interpersonal Effects in Consumption: Evidence from the Automobile Purchases of Neighbors

Much research has been devoted to what is often called herding behavior. This is the idea that investors trade just because others are trading. This is often cited as evidence of irrationality by finance behavorialists. (Is that a word? It should be!) Grinblatt, Keloharju, and Ikaheimo examine this type of behavior by looking at car purchases. No, really. They find that “a consumer’s purchases are strongly influenced by the purchases of his neighbors, particularly purchases in the recent past and by neighbors who are geographically most proximate. There is little evidence that emotional biases, like envy or an urge to conform, lie behind the interpersonal influence in automobile consumption.” While I not 100% convinced that envy does not play a role, the information angle is compelling. GREAT read! [FinanceProfessor.com Annotation]