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An Experimental Study of the Impact of Social Comparison on Investment *
Author(s) -
Hoover Gary A.,
Kimbrough Erik O.
Publication year - 2016
Publication title -
social science quarterly
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.482
H-Index - 90
eISSN - 1540-6237
pISSN - 0038-4941
DOI - 10.1111/ssqu.12228
Subject(s) - poverty , investment (military) , consumption (sociology) , economics , inequality , interpretation (philosophy) , public economics , demographic economics , microeconomics , economic growth , sociology , mathematical analysis , social science , mathematics , politics , political science , computer science , law , programming language
Objectives With increasing attention being paid to inequality and poverty, this article attempts to shed light on mechanisms by which the poor arrive at decisions that are suboptimal and lead to “poverty traps.” Methods We design a laboratory experiment in which we induce wealth and income differences between subjects to compare their behavior in a simple, two‐period life‐cycle savings and consumption task that controls subjects’ homegrown risk preferences and isolates the impact of social comparison. Results We find evidence that social comparison leads to suboptimal investment choices among the income‐poor. Conclusions One interpretation is that this is driven by a discouragement effect among those who are less likely to benefit from their investments—despite that fact that, by design, investment by all types leads to the same increase in expected utility.