The influence of one's social environment on financial decisions is profound, pervasive, and almost entirely absent from the formal discourse of investment education. Textbooks on portfolio theory discuss expected returns, risk, and diversification. They do not discuss the powerful pull of watching a colleague describe his cryptocurrency gains at dinner, or the social discomfort of sitting out a bull market while one's peer group participates, or the implicit status dynamics that make investment decisions partly about signalling competence. These social dimensions are, for most individual investors, more consequential determinants of behaviour than any formal theory.
The mechanism is partly informational and partly social. When people one knows and respects are investing in a particular asset class, this constitutes genuine information—evidence that the opportunity has attracted at least some rational actors. In this sense, social observation is a legitimate input to investment decision-making. The problem is that it arrives chronologically late relative to the optimal entry point. By the time an investment opportunity has penetrated sufficiently into one's social network to generate dinner-party conversation, the early adopters have already established their positions at lower prices.
The failure to feel that one has enough—the persistent sense that one's financial position is inadequate relative to some benchmark—is one of the most powerful drivers of poor investment decisions. And the benchmark is rarely abstract. It is anchored in what one's peers appear to have, what returns they are reporting, what assets they are discussing with enthusiasm. The investor who might otherwise be content with a diversified, low-cost portfolio becomes dissatisfied with it when her peer group is posting about exponential gains from speculative assets. The compulsion to keep up generates risk-taking that her actual financial situation does not require.
There is a further dynamic that intensifies the problem. Investment gains in bull markets are heavily discussed and socially visible. Losses are not. The investor who hears about a friend's significant gain in a speculative asset does not typically also hear about the significant losses that friend subsequently experienced. Survivorship bias operates at the social level: the stories that circulate are the success stories, because failure is embarrassing and success is worth sharing. The resulting social information environment dramatically overstates the typical outcome of speculative investment.
The practical implication is that investment decisions should be insulated from social influence to the maximum degree that circumstances allow. This does not mean ignoring all social information. It means establishing an investment policy that specifies what one owns and why, and that does not include "because people I know are making money on this" as a valid reason.
The investor who can articulate a specific, evidence-based reason for each position in her portfolio—one that does not reduce to social observation—is in a fundamentally different position than one who has assembled a portfolio based on what her social environment has validated.