Investor Psychology

The Power of Peer Pressure

Comparing yourself with others may provide a helpful nudge when it comes to saving for retirement or staying healthy.

Is peer pressure a bad thing? Most parents of middle schoolers would surely say yes. But comparing yourself with others may provide a helpful nudge when it comes to some areas of your adult life, such as saving for retirement or staying healthy. And yet, like those fraught relationships in middle school, it's complicated.

Behavioral economists have long relied on peer pressure to achieve public policy goals or to promote good health or financial security. For example, software firm Opower, a unit of Oracle Corp., works with utilities to provide 18 million homes with energy-usage reports that include comparisons with neighbors’ usage. You might see that you used more electricity over the past month than similar homes in your area, as well as how much more that cost you. Since the program began in 2009, customers competing with the Joneses have trimmed energy usage by more than 11 terawatts, representing $1.1 billion in savings, according to Opower.

Empower Retirement, a retirement-plan administrator serving 8 million participants, takes advantage of its rich customer database to spur saving. “We have your age, gender, salary, savings rate and how much you’ve saved,” says Empower president Ed Murphy. Savers can see how they stack up against others most like themselves, as well as against super savers in the top 10% of their peer group. Whether you call it peer pressure or inspiration, such comparisons boosted savings rates by 25%, Empower found.

Robert Cialdini, psychology professor emeritus at Arizona State University and author of Influence: Science and Practice, doesn’t like the term pressure. Says Cialdini, who conducted the original Opower research, “You’re not pressuring anyone. Just telling people honestly what their peers are doing is enough to change behavior.”

Pressure that backfires. Except sometimes, it isn’t enough. Yale finance professor James Choi was surprised by his findings last year that 401(k) participants who were saving too little put aside even less after being clued in to what their coworkers were saving. “These people got discouraged and demoralized to see how far behind their peers they were. They just disengaged,” Choi says. His conclusion: “Peer comparison is at best not very effective and, at worst, could backfire.” It might be better to focus on other strategies to increase savings, such as automatically enrolling people in 401(k) plans and increasing their contribution rates, Choi says.

But advocates of such comparisons say the key is choosing the right peers in the first place. In some cases, that means avoiding the top dogs. New research from the Perelman School of Medicine at the University of Pennsylvania found that by challenging workers to a 7,000-step-per-day competition, employers who wanted to promote healthy lifestyles had the most success when teams were given the chance to win some money (duh) and were compared with peers who were in the 50th percentile of steppers—in other words, just average. Teams that got the financial incentive but were compared with colleagues who had stepped their way into the 75th percentile did not do as well.

People are especially likely to turn to peers when things are unfamiliar or when they’re uncertain about what they should do in a particular situation, says Cialdini. “You don’t look inside yourself when you’re uncertain—all you see is ambiguity. You look outside, to experts or peers.”

Backing up peer comparisons with actionable advice is key. It doesn’t do much good to know you’re using more energy than your neighbors unless you also get advice on energy-efficient appliances, say, or how to better insulate your home. Similarly, budgeting tips, cash-flow management tools and debt-repayment strategies can help put retirement savings on a faster track.

Adolescence has proved time and again that peer pressure is powerful. The challenge is to harness it effectively.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your stimulus checks.
February 19, 2021
The Current Plan for $1,400 Checks
Coronavirus and Your Money

The Current Plan for $1,400 Checks

Here's what you need to know about the stimulus check plan currently being considered in Congress for President Biden's COVID-relief package.
February 18, 2021
Want More Tax-Free Retirement Income? One Man’s Whole Life Decision
life insurance

Want More Tax-Free Retirement Income? One Man’s Whole Life Decision

Whole life insurance might not be something that’s on your retirement planning radar, but for this client, here’s how it served his need to control ta…
February 23, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
2 Top-Tier T. Rowe Price Mutual Funds
mutual funds

2 Top-Tier T. Rowe Price Mutual Funds

T. Rowe Price's mutual funds typically stand out among their peers, but these two selections provide elite equity and bond exposure for this point in …
February 24, 2021
How Green Are Your Bonds?
Becoming an Investor

How Green Are Your Bonds?

Fixed-income investors can make an environmental impact.
February 23, 2021
Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio
stocks

Warren Buffett Stocks Ranked: The Berkshire Hathaway Portfolio

The Berkshire Hathaway portfolio is a diverse set of blue chips and, increasingly, lesser-known growth bets. Here's a look at every stock picked by Wa…
February 17, 2021