In 2005, a drastic reform in the Israeli capital market shifted the power to choose savings vehicles from employers to individuals. Using a unique dataset from a large employer, this event provides us a rare window into individuals' savings decisions and the effect of their social environment. In the first year following the reform's implementation, 7% of the employees switched out of the fund in which they all previously saved. Choice of fund was not associated with observable measures of fund performance, but was strongly affected by the employees' social environment. Exploiting within-department variation in peer groups, we find that savings decisions were strongly influenced by the choices of co-workers from the same ethnic group. Interviews also point to the influence of non-professional colleagues.
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We are especially grateful to Eugene Kandel for comments and discussions. We further thank the editor, two anonymous referees, Itai Ater, Simon Benninga, James Dow, Juan Pedro Gomez, Marielle de Jong, Avner Kalay, Victor Lavy, Daniel Maman, Renana Peres, Ilia Rainer, Analia Schlosser, Dan Weiss, Avi Wohl, Yishay Yafeh and seminar participants at Bar Ilan University, Ben Gurion University, Haifa University, the Hebrew University, Tel Aviv University, the 2013 8th Annual European Winter Finance Conference (Switzerland) and the Dauphine-Amundi Chair in Asset Management workshop (Paris). This project received financial support from the Pension Planning and Social Financial Program established by Clal Insurance Enterprises and Tel-Aviv University, the Rothschild Caesarea Center for Capital Markets and Risk Management (Mugerman, Sade and Shayo) , the Dauphine Chair in Asset Management and the Kruger Center at the Hebrew University (Sade and Mugerman) and the Julian Simon Research Fund at the Hebrew University (Mugerman).
- Financial reform
- Peer effects
- Savings decisions