Understanding the retail investor: Brooke Harrington’s Pop Finance

June 26, 2009

If anything, the credit crisis has shown that men and women on the street do not conform to the model of economic rationality. Retail investors, home buyers and credit card users often act against their own interest. In the US, this concern is a pillar of the financial regulation proposed by the Obama administration. Hence the proposed Consumer Financial Protection Agency.

But, as with so many other things, regulation is based on a theory of how the financial consumer behaves. Yet what do we know about that? It is to this controversy that Brooke Harrington’s latest book, Pop Finance, makes a contribution. (You can download the first chapter from her website.) James Baron has just published an interesting — and very positive — review of the book at Administrative Science Quarterly. Here’s an excerpt from the review.

Pop Finance offers a lucid, lively, and literate portrait of an
important and intriguing institution: the investment club. The
book is an ethnographic tour de force, deftly combining
detailed observation of seven Bay Area clubs before and after
the dot.com craze, results from a 1998 survey that Harrington
sent to several thousand investment clubs across the U.S.,
and secondary analysis of archival materials on investment
clubs and their members. The payoff is considerable. Harrington
has acquired an unparalleled understanding of these
organizations, their members, and the contexts in which they
operate. She is able to draw linkages between her fi ndings
and a broad array of important scholarly and policy concerns,
such as how the gender composition of clubs affects clubs’
performance and persistence, how concerns about identity
(particularly relating to gender) shape decision making in
these groups, and how the rise of this form of “investor populism”
is likely to affect corporations. The variety of lenses
through which Harrington views and analyzes investment
clubs is impressive; just the breadth and depth of the reference
list alone may justify owning Pop Finance .

Harrington begins by charting the rise of the “ownership
society” and how investment clubs relate to that trend.
She turns next to how the clubs function and how their
members make decisions. Given the bewildering range
of choices available to would-be stock market investors,
Harrington not surprisingly observes considerable evidence
during club meetings of bounded rationality and reliance on
many of the cognitive shorthands emphasized by behavioral
economists. But, she argues, there is much more going on.
She documents that club members seek through their
purchases to forge and reinforce social identities and to
affi rm their collective understanding of the world:

In this light, the stock market can be viewed as a collective attempt
by millions of people to establish an intersubjective reality called
“value.”. . . investment in stocks requires the construction of imaginative
links between signifi ers (the stocks) and the signifi ed (value).
This is why narrative is so important in shaping understanding of the
stock market: it is literally the lingua franca of investing. (pp. 47–48)

The arrows between stock market decisions and social
identity appear to go in both directions. Clubs rely on shared
aspects of their members’ identities in choosing stocks,
imposing “identity screens” alongside the fi nancial screening
tools they routinely employ. Such behavior is conspicuously
on display when it comes to “socially responsible” and
“faith-based” investing, but Harrington fi nds that it is far more
general than that. In purchasing stocks, clubs are not merely
investing; they are simultaneously consuming, using their
purchases to establish or maintain a shared view of the social
landscape. A compelling example is one all-female club
Harrington observed discussing whether to purchase Harley
Davidson—a very hot stock at the time—but deciding in the
end not to do so because the members would not want to
see their kids riding choppers. Once members agreed that
the stock did not jive with their shared value system, they
shifted immediately to an alternative prospect, Callaway Golf,
which they regarded as much “safer” (in a social rather than
fi nancial sense). Gender identities seem to be especially
salient in shaping stock purchases, with women relying
principally on their role as consumers in identifying targets
and men seeking to leverage their work and professional
identities to spot attractive opportunities.


3 Responses to “Understanding the retail investor: Brooke Harrington’s Pop Finance”

  1. Brooke Says:

    Hi Daniel,
    I was struck by the point you make in the first paragraph: “Retail investors, home buyers and credit card users often act against their own interest.” I’d never considered that way of looking at the phenomenon before; your phrasing reminded me of the term “false consciousness” and the frustration Marx expressed in “The 18th Brumaire of Louis Bonaparte,” regarding the “lumpenproletariat” acting against their own interests in the political arena.

    Have you (or anyone you know) blogged about that issue of people “acting against their own interest” in the economic sphere? The new book by Thaler and Sunstein (“Nudge”) fits into this theme nicely, because it *starts* from this premise that people don’t know their own economic best interests and need to be nudged in the “right” direction by experts and incentives. The authors coined the term “libertarian paternalism” to describe this approach to economic policy: (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=405940). You may already know about this, but if not, it seemed like a good fit with
    your perspective in “Socializing Finance.”


  2. danielbeunza Says:

    Glad you found the point enticing. My perspective, however, is very much counter to behavioral finance. Behavioral finance starts from the presumption that the probability distribution of investment return can be known in advance, and that those actors who do not maximize them are exhibiting biases. Along with Nassim Taleb (who calls this “the ludic fallacy”), I disagree. Investing is not like tossing coins. The real question that investors confront is, what are the real prospects for this stock.

    Seen in this light, taking identity and values into account are not a shorthand or a heuristic (or a luxury for tea-sipping leisurely ladies) but a way to understand the real prospects of an actual company. In my research with Fabrizio Ferraro, we are exploring how Bloomberg is adding calculative technology to these values-based judgements.

    As for libertarian paternalism. It is the worst thing that could come to the economy. I am preparing an entire post devoted to this…

  3. Srinivas Rao Says:

    Great article, The concept of value investing has encouraged me to start a portal of value investing on the Indian stock markets. I am doing analysis of Low PE, High dividend yields, Low PB and Low PB with high returns. I really appreciate the effort you have put in your blog.

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