Beyond Rational Choice: Social Interaction and Financial Market Participation in Later Life

Abstract Using pooled 2019 and 2021 China Household Finance Survey data on 8,650 adults aged 60–95, this study shows that social interaction is positively associated with participation in risky financial markets. We estimate Probit models and Karlson–Holm–Breen (KHB) decompositions, followed by IV-Probit estimates using a leave-one-out community average social interaction index. Supplementary IV-Lasso and Double Machine Learning estimators with cross-fitting corroborate these results, suggesting that this association is unlikely to be driven by unobserved confounding. The KHB decompositions further reveal that the association operates through two distinct channels: objective financial literacy and, most strongly, risk preference, which accounts for 81.71% of the total effect in its separate decomposition; evidence for subjective financial literacy is weaker, and community heterogeneity shows no indirect effect. These findings suggest that social embeddedness in later life shapes financial behaviour through informational and risk-preference pathways, with implications for financial inclusion policies targeting older adults, subject to the limitations of the proxies and instrumental variable assumptions.