- App dealing leads to worse investment outcomes, study finds
Not only do smartphones suck us into hours of scrolling social media following people we don’t like, trick us into buying things we don’t need and tempt us into taking photos we don’t want to look at – they’re also making us worse investors.
The ability to trade quickly at low cost with constant news flow should, theoretically, improve our investment chances. Technological development in recent decades has done wonders for cutting costs and making markets more accessible to private investors. But a recent study by German and American academics published by the Leibniz Institute suggests a transition to app-based trading may do you more harm than good.
The researchers tracked the transactions of 15,000 customers of two large German retail banks over a seven year period and found that when people placed transactions on their mobile app they were 8 per cent more likely to buy “riskier lottery-type stocks” than when they traded via a computer. Transactions placed on apps were also 12 per cent more likely to be for “past winners” – stocks that had enjoyed a recent surge.
An interesting thing about this study is that they were able to monitor the same people trading both on smartphones and desktops. And while we might brush off reckless trading as the preserve of the Robinhood generation, the average age of participants in the study was 45, with nine years of investing experience.
Perhaps the results aren’t so surprising. As the researchers point out, Nobel Prize in Economics winner Daniel Kahneman’s bestseller, Thinking Fast and Slow, hypothesises that we have two modes of thinking. System 1 is fast, instinctive and emotional, and system 2 is slower, more deliberative and logical. Smartphones’ provision of trading instantaneously wherever we want may entice more impulsive system 1 behaviour. Gamified features and lists of apps’ hottest stocks are unlikely to help.
None of this bodes particularly well for the huge rise we’ve seen in mobile trading. Commission-free trading apps in the UK have attracted hundreds of thousands of new customers in the past couple of months as opportunistic traders have sought to cash in on market volatility, exacerbating it in the process.
The more traditional platforms are not immune to the rise in mobile trading either. Hargreaves Lansdown’s latest results revealed a 57 per cent increase in clients logging on via their phones in the second half of last year. And 34 per cent of customers on AJ Bell Youinvest now trade via their app, up from 21 per cent at the beginning of 2019.
Clearly the use of smartphones among investors is going to increase. To put things into perspective, studies suggest new technological developments often have adverse effects in early stages of adoption. For example, the shift to internet-based trading in the 1990s from dial-up connections was associated with increased turnover and reduced performance.
The best thing for investors to do is to stick to their principles and remember that the most successful investors tend to have low portfolio turnover. Investment apps do present us with an extra tool for monitoring information and dealing. But be aware of the hazards they present.