(© Jacob Lund - stock.adobe.com)
BINGHAMTON, N.Y. — Want to boost your chances of investing in the stock market and building long-term wealth? The secret might lie not in reading financial newsletters or watching CNBC, but in who you grab coffee with. New research suggests that having wealthy friends dramatically increases your likelihood of investing in stocks and maintaining savings accounts – potentially making a significant difference in your financial future.
The study published by the National Bureau of Economic Research in March 2024 examined the social networks of over 27 million Facebook users alongside IRS tax return data to understand how our friendships affect our financial behaviors. Researchers found that people with more high-income friends were significantly more likely to invest in stocks and maintain savings accounts, even after controlling for factors like education, income, and financial literacy.
“Given that the total return to the U.S. stock market from 1980 through September 2024 has been over 12,000% – for example, $1,000 invested in the S&P 500 in 1980 would be worth $121,350 today – this creates a disparity in wealth for those who participate relative to those who do not,” study co-author Brad Cannon explains in a post he published on The Conversation. “Understanding why some people invest and others don’t is important for addressing social concerns such as rising inequality.”
Just how big is this “rich friends effect”? Having 10% more high-income friends in your social circle is associated with a 2.9% higher likelihood of investing in the stock market and a 5% higher chance of having a savings account. To put that in perspective, that’s an 18% increase in stock market participation compared to the average person.
“Economic connectedness” – the researchers’ term for the proportion of high-income people in someone’s social network – proved far more important than other social factors in predicting financial behavior. In fact, it explained more than 56% of the variation in stock market participation across counties, dwarfing the impact of other social measures like community involvement or how tightly knit social groups were.
“We found that in counties where friendships with prosperous individuals are more common, investment and savings tend to be higher,” writes Cannon. “Moreover, we found that having these friendships with wealthy individuals plays a more important role in shaping financial behaviors than two other aspects of social capital we looked at in our study: having a tight group of friends and living in a community with strong civic engagement.”
But what drives this effect? Is it simply about having opportunities to interact with wealthy individuals, or is it about wealthy people’s willingness to form friendships across social classes? The researchers found that mere exposure to high-income individuals was seven times more important than any bias in friendship formation. In other words, just being in environments where you regularly encounter wealthy people – whether at work, school, or recreational activities – appears to be the key factor.
This finding has important implications for addressing wealth inequality. Consider two scenarios: In the first, a low-income person works at a company where they rarely interact with high-earning executives who stay on separate floors. In the second, they work at a company with an open floor plan where executives and entry-level employees share the same break room and regularly chat. The research suggests the second scenario could lead to better financial outcomes for the lower-income employee, simply through increased exposure to people with more investment experience.
The study found these effects hold true for both high and low-income individuals, though they manifest differently. For lower-income people, having wealthy friends primarily influenced whether they started saving or investing at all. For higher-income people, it affected how much they invested or saved. This suggests that social connections might help people progress through financial milestones: first opening a savings account, then beginning to invest in stocks, and finally increasing their investment amounts.
The researchers point to some everyday places where these valuable cross-class interactions naturally occur: casual restaurant chains like Olive Garden and Applebee’s, as well as public spaces like libraries and parks. These venues might be doing more than providing meals and recreation – they could be facilitating the social connections that help people build wealth.
“Of course, making wealthy friends alone does not guarantee you’ll invest or save more,” Cannon says in his post on The Conversation. “But perhaps knowing people who invest makes it less daunting and fraught, particularly if those friends can serve as a resource and sounding board.”
So the next time you’re debating whether to join that tennis club where you might feel out of place, or take that job at a company where most employees earn more than you, consider the hidden financial benefits. Your next friendship could be worth more than just good conversation – it might just help secure your financial future.
Paper Summary
Methodology
The researchers combined two major data sources: friendship data from 27.2 million Facebook users and financial information from IRS tax returns at the county level. They measured “economic connectedness” by calculating the fraction of high-income friends in people’s social networks. They also tracked stock market participation by looking at who received dividend income (a proxy for stock ownership) and savings behavior by monitoring interest income. To ensure their findings weren’t just correlation, they used several clever techniques, including looking at childhood friendships (formed before people start making investment decisions) and examining how changes in the income of distant friends affected local investment behaviors.
Results
The study found that economic connectedness was the strongest predictor of financial behavior, explaining over 56% of the variation in stock market participation and 54% of saving participation across counties. A one standard deviation increase in economic connectedness was associated with a 2.9% increase in stock market participation and a 5.0% increase in saving participation. The effect was particularly strong for low-income individuals making their first steps into saving and investing.
Limitations
The study relied on Facebook friendship data, which might not perfectly reflect real-world relationships. Additionally, using dividend and interest income as proxies for stock market participation and savings behavior means the study might undercount people who invest in non-dividend paying stocks or save in non-interest-bearing accounts. The county-level analysis also means individual-level effects might differ.
Discussion and Takeaways
The research suggests that increasing opportunities for cross-class social interaction could be an effective way to promote better financial behaviors, particularly among lower-income individuals. This has implications for workplace design, urban planning, and social policy. The findings also suggest that the “participation puzzle” – why many people don’t invest in stocks despite the historical benefits – might have more to do with social factors than previously thought.
Funding and Disclosures
The research was conducted through the National Bureau of Economic Research. The authors acknowledged helpful comments from Siew Hong Teoh. The authors noted that their views do not necessarily reflect those of the National Bureau of Economic Research. The paper was published in March 2024 and has not yet been peer-reviewed.
