COLUMBUS, Ohio -- The desire of investors to keep up with the Joneses -- and even get ahead of them -- is the driving force in the volatility of the stock market, a new study suggests.

Economic researchers at Ohio State University and the University of Marlyland tested the classic economic theory that people pursue wealth not just to buy more goods, but also to increase their social status among their peers.

This theory, first published by the famous sociologist Max Weber in 1905, had never been tested using modern statistical and computer methods, said Zhiwu Chen, co-author of the study and assistant professor of finance at Ohio State's Max M. Fisher College of Business.

This new study used a computer analysis of U.S. economic data and New York Stock Exchange data from 1959 to 1991 to show that Weber had it right.

"Our study suggests that investors, in general, trade heavily in order to increase their wealth and their social status

among their peers," Chen said. "And this, in turn, leads to stock market volatility."

Chen conducted the study with Gurdip Bakshi of the University of Maryland. Their analysis was published in a recent issue of The American Economic Review.

Weber's theory, outlined in his 1905 book The Protestant Ethic and the Spirit of Capitalism, stated that there is a "spirit of capitalism" that drives people to increase their wealth, in part to enhance their social standing.

The major competing theory is that people seek more wealth simply so they can buy more goods -- houses, cars or whatever.

If this competing theory is correct, then changes in the value of the stock market should be related to changes in consumption of goods by consumers, Chen said. People would earn more in the stock market so they could buy more goods.

But the researchers' analysis showed no such connection between U.S. consumption figures and stock market value.

"If the consumption theory was correct, consumption of goods and services in the U.S should be as volatile as the stock market," Chen said. "But that hasn't been true."

How does the search for social status lead to stock market volatility? Chen said that investors who are eager to make more money than their peers will watch the market closely and trade stocks whenever they see the slightest opportunity to increase their wealth. This eagerness to trade in order to increase earnings helps make the market volatile.

"This leads to a self-reinforcing volatility cycle because a volatile market means that investors have to make even more trades to keep ahead of others," Chen said.

The results of the study aren't surprising, Chen said, especially since the theory has been around for nearly 100 years. "But until now it was just a philosophical hypothesis. We were the first to use real-life data to test the theory."

Contact: Zhiwu Chen, (614) 688-4107; Chen@cob.Ohio-

Written by Jeff Grabmeier, (614) 292-8457;

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