Is Your Smartphone Hurting Your Portfolio Performance?
Trading on your smartphone can affect how you invest.
Just about anyone has a smartphone nowadays and, in many ways, they have changed our lives for the better. Now, with just a swipe of a screen, we are able to keep up with the latest news, access a seemingly unlimited amount of information, and stay connected with our loved ones no matter where they are. However, as more and more financial institutions prompt us to “download [their] free app” as we log on to their site, it’s important to take note on how this may impact our financial decisions.
Recent research finds that the decisions we make on our smartphones aren’t the same as those we would make on our personal computers. And, as it turns out, maybe we should all stick to using our smartphones for social media and video calls.
Smartphone Investing and Trading Behavior
A team of researchers investigated the trading behavior of retail investors to identify differences in the trades executed on a smartphone versus those on a personal computer. Specifically, they looked at the trading activity of each investor across platforms on a monthly basis, controlling for selection effects at the investor and time level. The results indicate that the probability of purchasing riskier assets and chasing past returns increased for trades made with a smartphone versus a personal computer. These results are consistent across asset classes and over a longer time period (10 quarters).
In other words, investors were more likely to buy riskier assets and “hot” securities when they made trades on their smartphones.
How can where a person makes a trade impact their decisions? Well, it all comes down to how our minds work.
Constant Attention Can Backfire
The accessibility of investing platforms has shown a spotlight on investing, which can be a double-edged sword. On the one hand, bringing the power of investing to more people is a great accomplishment. But, on the other hand, excessive attention on investing without proper education can induce investor errors and returns-chasing behavior (that is, meme stocks).
The negative impact of excessive attention could be behind the dangers of smartphone investing. Given that our smartphones are always within arms’ reach, that level of attention on our portfolio and trades can be prompting us to take on excessive risk and chase after the latest newsworthy stocks.
Surprisingly, Easier May Not Be Better
Smartphone apps make trading easier than ever. A person can see something online, consider a trade, open their app, and hit “trade” within a span of just a few minutes. However, this dismantling of the barriers to trading can make us more prone to ‘System 1′ thinking.
System 1 thinking is the “fast thinking” side of our mind that relies on rules of thumb and mental shortcuts and, as a result, it can be more impulsive and get us into trouble when making financial decisions. How easy our smartphones make it to trade may be prompting us to make gut decisions, when investing decisions should depend more on careful consideration and fundamental analysis.
So, Should We Avoid Our Smartphones When Trading?
Research suggests that we don’t always make the best investing decisions when making trades using our smartphones. Instead, we tend to rely on System 1 thinking, which leads to more-impulsive decisions that nudge us toward chasing returns and riskier assets. Of course, everyone is different, and maybe some of you can rein in the temptation of buying a new “hot” asset as soon as you see it in the media, but I know I’m not so disciplined. I, for one, will be reserving my trading decisions for my desktop computer.