On friends, family and finances

Here’s a pop quiz: Did you ask a friend or family member the last time you were pondering a financial decision? Why or why not? And if you did, did you actually take their advice?

The field of sociology is not one we immediately connect with the world of hard numbers, money and finance. Yet, it feels intuitive and natural that friends and family must have some bearing on an individual’s financial and particularly investment and savings activities. But how to get an objective view? And more importantly, what does that objective view imply for specific groups or segments, such as women, for example?

I recently ran across a Harvard University research paper, albeit dated, that looked into this exact question, and came up with some interesting data and conclusions. In this paper, the author, Mariko Lin Chang of Harvard University, seeks to establish a statistical and analytically derived view of the role of social capital and social networks and savings decisions. And while the findings may make general sense, the questions the data raise are very interesting especially with regard to the implications for women and their savings an investment activities

Social networks are ubiquitous in savings and investment decisions

First, a quick look at the research. To understand the significance, it’s worth pointing out that social networks have proven to be of prime importance in three important areas: the job-match process, in determining what we buy as consumers, and interestingly, in the operation of financial markets. Would they not then also be a big driver in shaping individuals’ financial behavior? The higher cost of finding financial information and the importance of credibility and trust make it even more likely that networks would play a significant role in this domain.

For the analysis, the author looked at the triennial Survey of Consumer Finances conducted by the Federal Reserve Board in 1998. Arguably, the data may be obsolete. But on further thinking, I realized that while the actual access to data might be much faster and more widely accessible today, social norms, mores and behaviors are much harder to change, and therefore these findings would be interesting enough to take a look at – and sure enough, they were.

The highlights:

Of the 90% of households reporting that they save or invest, friends and relatives are the most frequently used sources of information for saving and investing (41%), followed by bankers (27%) and media (~21%). Paid financial planners come in only at fourth place, tying with media at also about 21%.

However, when the households are stratified by wealth into quartiles, as measured by liquid assets, interesting patterns begin to emerge – in short, the use of social networks decreases significantly as socioeconomic status increases:

While friends and relatives are used significantly across all four quartiles of wealth, they are the most frequently used only for the lowest-wealth quartile (~46%).

The story turns dramatically for the highest wealth households, who turn to a paid financial professional more than half the time (~53%). Media come in second for this group, being consulted about 36% of the time, and social networks are used only as the third most common source, about 34% of the time.

Interestingly, households headed by single females and younger households also use social networks more than the reference group (married or cohabiting couples) for their savings and investment decisions – probably reflecting their greater involvement with social networks

Bankers are more likely to be used by less-educated and more risk-averse households, regardless of the level of wealth, presumably because they are less inclined to invest in riskier stocks or other similar instruments.

Media use increases as the individuals’ educational level increases, but decreases as income level increases. But this conclusion has to be taken with a grain of salt because the data does not allow us to see the differences between magazine ads for hot stocks and a scholarly article in the Value Line survey, for example, which betoken two vastly different styles and decision-making types. But what is clear is that as education level increases, households tend to increase the number of media sources they turn to, presumably to check and corroborate the information they find in each of these sources, prior to making these decisions.

Photo by hao wang

Patterns of usage of the social network

It appears that social networks are used more widely when the individual has access to fewer resources (for example, money to hire a paid financial professional, or access to a resource-rich or information-rich network).

The more tantalizing finding from the study is that the exclusivity of the use of networks changes as socioeconomic status increases. What the study found was that it was only those at the bottom of the socioeconomic ladder that use networks exclusively to drive their savings and investment decisions. People using networks in addition to other sources were in the middle of the spectrum. But those who do not use networks at all have the highest socioeconomic status of all.

More interestingly, as a household’s socioeconomic status increases, they are likely to use more sources to guide their savings and investment decisions, except for their social networks. This is possibly because they either don’t need to, being able to afford the most sophisticated paid advice, or the information they receive is so embedded in their day-to-day communication (“tee-talk”, for example), that it is not regarded as getting investment-specific information from the network at all.

Photo by Edan Cohen

Questions and implications:

Do these findings matter when it comes to women? As I read the study findings, a few big questions kept popping up in my head:

  • Are women disproportionately represented in any specific socioeconomic category? If yes, there would be clear implications for how they get their investing information, and how good that information is likely to be (Unfortunately, the study does not allow that level of analysis)
  • To the extent that social networks do form an important and valuable source of information, are there barriers that tend to work against women? For example, while women tend to have extensive social networks, it is also more likely that the topic of money, savings and investments is considered taboo, and “not nice” to bring up, thus wiping out the value of good information your network might have. For example, in a female friends’ circle of lawyers, investment bankers and finance industry professionals, how often is the topic of good investment alternatives likely to come up? I don’t have hard data to back this, but I’d be willing to bet it would be a small fraction of the number it would be for a similar men’s group. That’s a problem.
  • If we assume that paid financial professionals are a reliable source of solid advice, then we should also have confidence that this advice is dispensed equitably regardless of the gender of the client. Anecdotal, consumer survey and even a smattering of academic studies say that this is not the case – which is also a problem
  • Media is seen to be an important source of financial information. To the extent that this media is seen as either biased, or more likely, simply incomprehensible to women, then another important source of financial information starts to get diluted for women.

Collectively then, what this means is that all sources of information on savings and investment decisions are likely to constrain and further shrink the universe of possible investment solutions as well as potentially distort the quality of available financial expertise and knowledge where women are concerned.

Rather than to beat our chests in despair, I think the right approach is to take a hard-nosed and highly objective look at which of these is likely to be the most harmful and pervasive. Once that is done, we can take a systematic and thoughtful approach to countering that influence as part of the design and delivery of an effective solution specifically seeking to meet women’s financial needs.


Chang, Mariko Lin. “With a Little Help from My Friends (And My Financial Planner).” Social Forces 83, no. 4 (2005): 1469-497. http://www.jstor.org/stable/3598401.

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