Does the Internet create overconfident traders?

[RichKid]

An interesting topic in behavioural finance, there has been research done on male vs female share traders and overtrading, this suggests that the internet makes it worse. I think they allude to 'confirmation bias' as well. Good to read Van Tharp too for other biases.

Internet encourages overconfidence in share trading
SHAREHOLDER
Stuart Wilson May 02, 2006
http://www.theaustralian.news.com.au/story/0,20867,18993162-643,00.html

THE share market has been powering forward for some time now, giving many novice investors - and some experienced ones too - serious overconfidence problems.

One of the biggest mistakes you can make as an investor is thinking that your wonderful investment strategy is responsible for great returns, when your portfolio has merely benefited from a buoyant market.

The ability to buy and sell shares over the internet has also been shown to produce overconfidence.

This recent phenomenon is most prevalent when investors initially switch to online trading. Their overconfidence is helped along because they suddenly have access to a wealth of information on the market, the economy and individual companies, making them feel better informed than ever before.

Online trading also gives investors better access to transactions. The process is much simpler than calling your stock broker and it is usually both cheaper and faster.

This leads to a greater number of trades, the cost of which is often ignored by punters.

Perhaps it is not surprising that men show a much greater tendency towards overconfidence than women.

Men trade 45 per cent more often than women when online and their returns lag females' returns by about 1 per cent a year.

There are many teams of very intelligent, market-savvy, hard working and well-connected analysts making investment recommendations every day. Why is it then that so many part-time investors who are not in the investment industry and have no access to management think they can get better results by relying on their own judgment?

Here we see another facet of overconfidence - rationalisation. Some retail investors discount the views of the professionals - especially when it disagrees with their own opinion - and point to brokers' conflicts of interest.

Another common psychological trap that feeds overconfidence is called the "false consensus effect".

This is where you think that your point of view is shared by the majority of people, and can result in flawed investments decisions, and again, overconfidence.

For example, ask yourself if Telstra is a "buy" or "sell" at the moment. Now ask yourself what percentage of people would agree with you.

Irrespective of your view on Telstra, it is probable that you have overestimated the number of people who think you are right.

It is important to realise that just because you have access to more information it doesn't mean that you have read it. If you have read it, that doesn't mean you understand it. If you understand it, that doesn't mean you have correctly interpreted it.

The fact is, overconfidence increases in line with the difficulty of the task, making investing in shares a prime candidate.

This whole area of investing psychology, known as behavioral finance, is perhaps the most overlooked subject in investment education. Because it affects both the novice and experienced investor, it would serve shareholders well to better understand overconfidence, how to identify it and how to control it.

Stuart Wilson is chief executive of the Australian Shareholders Association Ltd

 

[ctp6360]

This quote sums the whole thing up:

There are many teams of very intelligent, market-savvy, hard working and well-connected analysts making investment recommendations every day. Why is it then that so many part-time investors who are not in the investment industry and have no access to management think they can get better results by relying on their own judgment?

Why is it that these teams of very intelligent, market-savvy, hard working and well-connected analysts can be consistently outperformed by these internet idiots?

This article was very biased, I mean look at the way he portrays the brokers/fund managers, this guy obviously has a vested interest in what he's writing, what a load of ****.

Stuart Wilson is a moron!

 

[tech/a]

"Anyone can make a $$ out of a Bullmarket"

Suprising how hard it is the find consistantly profitable "Anyones"

 

[visual]

If the problem is that we dont read,or understand the information,or think that we do,then the only explanation for my personal experience is that the AMP agent that was listeninig to me was really hearing himself, you know if I sell this product to them I can, my children can, etc...
Thanks Richkid for that article now I know the shareholders association is another waste of time.

 

[bullmarket]

Good morning everyone

I think overconfidence could be a real danger especially for those who have entered the stock market for the first time in the last 3 years since March 03.

With the stockmarket returning 20+%pa since then, anyone who has not made a profit during this time imo should take a serious look at their objectives and strategy. Hence especially for those who weren't around for the '87 crash and who have profited since Mar03 could be lulled into a false sense of security that markets will continue to rise at 20+%pa or whatever with only mild bouts of periodic profit taking. I'm certainly not expecting a crash, as was discussed in another thread, but imo there will be a correction at some time in the future.

With the internet giving 'mum and dad' traders/investors access to virtually the same info as stockbrokers/analysts and much easier and convenient access to buying/selling shares via online brokers there obviously has been an explosion in the number of traders/investors involved in the market during the last 5 years or so. So some of these 'mums and dads' could get hurt as a result of poor decisions due to over confidence in their ability and resources when a correction hits, especially if they have never experienced a correction before.

Anyway, just food for thought

cheers

bullmarket

 

[laurie]

lol Bullmarket love your signature that is me also....my aim is finding stocks that will pay a dividend I have added another this year in Oxiana maybe we should start a thread on possible stocks that can pay future dividends

cheers laurie

 

[nizar]

LOL laurie are u sure all those specs u own give u income?

But who cares, uv made a killing anyway

 

[markrmau]

One thing I have noticed a lot of (especially from that other web forum ) is people banging on about company fundamentals and T/A analysis, and then making statements that demonstrate they don't even understand how the market operates.

For example one person was posting continuosly about MMX (at 30-40c) about how rediculously overpriced it was, and that road transport of iron ore would never be profitable.

I almost fell of my chair when I saw the same person asking why 'the bids went crazy' just before 10am and after 4am.

Similar thing tonight with someone saying company XYZ had significant untapped resources and was worth an extra 20-30% on todays close. They went on to say that there were all these aftermarket trades at a higher price. (There wasn't, it was just the 4:15 matchout).

So yes, in these internet trading and incredibly bullish market conditions, we have very overly confident traders.

Don't get me wrong. Of course the first thing a newcomer will ask about are the preopen matchouts and that is fine. I asked the same question myself 3 years ago. I just find it surprising that some of these newcomers cr@p on like seasoned professionals when they don't even understand the basics.

I also know my limitations. I haven't traded during a bear market and do not think I would be capable of doing it...Hardest thing to do will be to recognize when it has come