As online retail activity soars, research highlights the top biases that can derail investors from making sound decisions
Whether they were bored, in need of alternative income, or flush with cash from stimulus cheques, people opened online investing accounts in droves over the course of the pandemic, propelling a recovery in financial markets that continued into record-setting highs.
Not all of the moves in the markets were rational. A short squeeze conducted by retail investors on shares of GameStop earlier this year, many Wall Street commentators agreed, went on far longer than it should. And according to new research from Cerulli Associates, at least part of that irrational behaviour was driven by the brokerage platforms themselves.
“Some platform providers, most notably Robinhood, went out of their way to encourage trading through gamification of their client interface with digital fireworks and confetti accompanying completed trades,” Cerulli said in a new paper.
As the paper noted, behavioural biases, if left unchecked, can undermine the long-term fundamentals of any investor’s portfolio.
Drawing from a 2020 survey of U.S. retail investors, it noted that nearly nine tenths (87%) said they succumbed to the availability bias, defined as a tendency to rely on information that’s readily available or easy to recall. Confirmation bias was a problem among four fifths of investors (82%), who said they seek information that confirms their perceptions or current views.
Meanwhile, three quarters (73%) said they were vulnerable to the recency bias, or the tendency to give outsized weight to recent news or experiences when making decisions. Another 71% said they were loss-averse, tending to feel worse about a loss than they feel good about an equivalent gain.
Arguably the most perilous bias for investors, however, is overconfidence. It was shared by nearly two thirds (63%) of those surveyed, suggesting a large tendency for investors to believe they’re able to outdo the market with their portfolio management skills – a claim that not even active managers in general are able to make.
“While it’s a laudable goal to give consumers choice, providers also need to be responsible when giving clients the freedom to pursue potentially self-defeating options,” Cerulli said.