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Some experiments are self-fulfilling prophecies. Morgan Spurlock put on weight by bingeing on Big Macs for his 2004 Super Size Me documentary. I became distracted and tetchy after switching on smartphone stock price alerts.
You can easily receive 10 or more notifications an hour if you follow enough assets closely. The effect is particularly galvanising if you choose a clanging stock exchange opening bell as your notification sound.
Price information has never been more available to private investors. But experts on behavioural finance say the data glut can make us poorer. It can override rational strategies by encouraging self-defeating activity.
“Most of us carry devices that have the capacity to ding if any of our stocks move a certain percentage,” says Ryan Murphy, global head of behavioural insights at data group Morningstar. “Does it make people happier? No. It causes anxiety. Is it a wise framing that improves decision making? No.”
To explore those propositions, I set my phone to trigger alerts for 1 per cent moves in a range of assets. These included shares and commodities I watch anyway, plus some stocks that are simply newsworthy. The latter group included Trump Media, a nascent social media business connected to the newly elected US president.
The share, which has the ticker DJT, has more than doubled in price on huge volumes since a September low. It has accordingly been hailed as a new “meme stock”, trading on internet buzz rather than fundamentals.
Halfway through the week-long experiment, my family threw me out of the room where they were watching TV. My noisy phone was getting on their nerves.
“Ethereum’s on a hot streak!” I told Baskerville, my sole remaining companion. He rested his head on his paws stoically. Dogs do not care about cryptocurrencies, not even Dogecoin.
Nor do I. I had no intention of buying or selling assets featured in the alerts, one of many flaws in my methodology. But the experiment proved Murphy’s contention that if you monitor price moves intensely you can end up shredding your nerves.
His point on framing held good too. Volatile, unproven assets such as DJT generated frequent notifications. These commandeered my attention and awakened a fear of missing out when prices were rising. Steady stocks with compounding earnings rarely rang bells and therefore slipped below the radar.
Price alerts can contribute to “availability bias”. This behavioural jargon describes what occurs when we favour information that is top of mind in our decision making.
A schematic example would be: “I have some spare cash. I should invest it. Everyone is talking about DJT. I will buy shares in DJT.”
The saner alternative would be “I have some spare cash. I should invest it. I will trickle it into diversified investments producing decent returns at acceptable risk. As for DJT, what’s that all about?”
The second approach makes more sense but is less immediately satisfying. “When something is happening in markets, people fiddle with their investments to feel more in control,” says Philip Seager, head of portfolio management at CFM, a Paris-based quantitative investment manager.
Private investors have a weakness for buzz-driven investment, according to much-cited research by Brad Barber and Terrance Odean. They reckoned professional investors lacked this.
Trading can be lucrative and fun. But, in general, it is best to do it with someone else’s money. If you are an amateur using your own capital, it can be expensive.
Outside the US, many brokers still charge minimum commissions for stock trading. These can mount up. Moreover, a series of studies suggest private investors tend to mistime transactions.
Behaviourists describe anxious or exuberant buying and selling as “overtrading”. The typical impact on returns, relative to a simple buy-and-hold strategy is defined as “the performance gap”. This amounts to some 1.2-1.5 per cent annually. Keep that up for 10 years and your portfolio would be worth 14 per cent less.
Experimentation more scientific than my own suggests that people feel compelled to overtrade even when they know better. Researchers at Amsterdam University, led by Professor Cars Hommes and sponsored by CFM chair Jean-Philippe Bouchaud, devised an investment game which illustrated this.
Students were issued with stake money. They knew they could expect decent returns from buying and holding a computerised “investment.” They knew trading would reduce those returns.
The guinea pigs still traded enthusiastically. They barely broke even in aggregate during the first game play. This compared with an expected 640 per cent payback from buying and holding.
Some price moves plainly matter. They herald important trends, for example higher base rates. But we need to filter out a lot of noise to discern any signals. There is nothing directly actionable for long-term investors in the gyrations of DJT, for instance.
A broker once told me about an old-fashioned client who called daily to fret over moves in his stocks. If any had dropped, the investor feared further falls. If any had risen, he dreaded losing his gains. In the end, the client instructed his broker to reject his calls, except those required for scheduled reviews and in emergencies.
Returns improved and the investor became a lot less miserable.
The alternative for the modern online investor is to switch off automated stock price notifications, cultivate Yoda-like serenity and stick to your long-term investment plan.
Jonathan Guthrie is a writer, adviser and former head of Lex. jonathanbuchananguthrie@gmail.com
