When investing trust people with low financial competence

As part of our weekly - or is it weakly? - consumer advice section today's topic is How to invest. You will love it because of this scientific paper.

Peer Advice on Financial Decisions: A case of the blind leading the blind?

Previous research shows that many people seek financial advice from non-experts, and that peer interactions influence financial decisions. We investigate whether such influences are beneficial, harmful, or simply haphazard. In our laboratory experiment, face-to-face communication with a randomly assigned peer significantly improves the quality of private decisions, measured by subjects' ability to choose as if they properly understand their opportunity sets. Subjects do not merely mimic those who know better, but also make better private decisions in novel tasks. 

Join up with a dunce and beat the index.

People with low financial competence experience greater improvements when their partners also exhibit low financial competence. Hence, peer-to-peer communication transmits financial decision-making skills most effectively when peers are equally uninformed, rather than when an informed decision maker teaches an uninformed peer. 

Qualitative analysis of subjects' discussions supports this interpretation. The provision of effective financial education to one member of a pair influences the nature of communication but does not lead to additional improvements in the quality of the untreated partner's decisions, particularly in novel tasks.