Loyalty, peer group effects, and 401(k)

In this paper we analyze investors’ behavior in the presence of social interactions. Two main models are explored: one based on peer group effects and the other on loyalty. The motivation for this study is the observed behavior of employees when choosing asset allocation for their 401(k) funds. Employees are typically overinvested in own company stock, while theory predicts a strong diversification motive. We argue that the proposed models justify this behavior, even in an environment with full rationality. We also contrast the implications of each model concerning other risky assets.