We’ve explained many times how trading individual stocks is a bad idea.
Markets aggregate all known information about the value of a particular stock. With every trade — and high-frequency traders are typically trading ten thousand times every second — market participants are giving their very latest best-guess estimate as to how much a stock is worth. The chances that you know something that all of the other traders out there don’t are extremely slim.
But new research suggests there’s something even worse you can do than trade stocks: it’s to trade stocks on your smartphone.
Four academics — two in Germany and two at Indiana University — have just published a working pager called Smart(Phone) Investing? A within Investor-Time Analysis of New Technologies and Trading Behavior.
Using transaction-level data from two German banks, they studied the effects of smartphones on trading behaviour. Comparing trades placed by the same trader in the same month across different platforms, they showed how traders buy riskier assets when they’re trading on a smartphone, particularly so-called lottery stocks. In other words, trading on a phone seems to have a disinhibiting effect.
Smartphone traders, the researchers found, are also more likely to chase performance, buying stocks that have performed well in the recent past.
Lasting change in behaviour
Furthermore, the research shows, the effect of smartphones does not appear to be short-lived and transitory. Traders who place riskier trades on their phones are more likely to repeat that behaviour in the future, regardless of whether they use a phone to trade on or not.
The authors of the paper conclude: “Collectively, our evidence suggests that investors make more intuitive (system 1-type) decisions while using smartphones. This tendency leads to increased risk-taking, gambling-like activity, and more trend chasing.
“Previous studies have linked these trading behaviours to lower portfolio efficiency and performance. Therefore, the convenience of smartphone trading might come at a cost for many retail investors.”
One fifth of trades are executed on a phone
These findings are, of course, troubling for those of us who are concerned about the huge growth in popularity of stock trading among young people.
Smartphone usage is also on the increase. In the United States, for example, the average person spends 5.4 hours a day on their phone.13% of Millennials say they spend more than 12 hours every day on it..
US brokerage firms report that more than 20% of all trades by retail investors were executed using mobile devices and estimate this percentage will double in the next few years.
Of course, firms like Robinhood understand this all too well, which is why they invest so much time and money in making their smartphone apps as fun and easy to use as possible.
So, if you are going to trade stocks — and we strongly caution against it — at least switch off your phone. Otherwise, that expensive new iPhone you splashed out on could end up costing you far more than you bargained for.
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