Does Google make investors overconfident and make many bad decisions?

Google seems to be blurring the line between knowledge in an investor's mind and knowledge available on the internet, causing them to be overconfident and make poor decisions.

Code Út chó:

09-10-2022  Will the Fed push the world's largest economy into recession?
09-10-2022  The world's oldest raw material becomes a valuable asset when Europe lacks energy...
October 8, 2022  Credit Suisse after a difficult week: Rich customers are afraid to withdraw money,...

Every day, we all need to read and ask questions to improve our financial literacy. But this October is a special month when Americans focus more on this issue. October is National Retirement Security Month with the goal of the month to help “increase personal finance literacy for all Americans.”

For many years, the level of financial literacy was not high, so the need was not new. However, the financial literacy of many people seems to be facing a new threat of modern society. That is the internet.

According to research by the Social Science Research Network (SSRN) published this past summer, the internet has led investors to think they know more than they actually have in mind. As a result of overconfidence, their portfolios underperform.

SSRN's study is titled "Confidence Without Competence: Online Financial Research and Consumer Financial Decision Making". The study was completed by marketing professor Adrian Ward at the University of Texas at Austin; Tito Grillo is professor of marketing, business and law at the University of Alberta and professor Philip Fernbach at the University of Colorado.

Research has come to some pretty interesting conclusions. Researchers have shown that using the internet to answer questions in their heads makes people mistakenly believe that they have received all the knowledge on the internet. Because after using the internet to look up information, most people will forget about that action.

This phenomenon is sometimes referred to as the “Google effect”. This is the blurring of the line between knowledge in the head and awake on the internet, making people think they know more about what they are doing.

The researchers went on to show that the Google effect causes investors to be overconfident. They substantiated this conclusion by dividing investors into two similar groups. One group will access the internet to take an investment knowledge test. The researchers then gave them an identical investment field challenge. After investors built their portfolios, they were asked how much money they would bet on the performance results from their portfolio.

Not surprisingly, the group with internet access scored higher than the group without internet access. The group with the higher scores also bet more money on the effectiveness of their investment choices. This shows a higher level of confidence in one's own investing abilities.

However, the overconfidence of this high-scoring group of investors was misplaced. The researchers found that, on average, investors in this group earned much lower returns than in the other group.

This phenomenon is known as “confidence without competence” which the researchers mentioned in the title of the study. The lower returns of the higher-scoring group of investors appear to be due to their willingness to take on more risk.

This new study reminds investors of the dangers of overconfidence and the necessary virtue of modesty. But what's valuable, and perhaps most disturbing, is the way investors use the internet to boost their confidence without even realizing it.

The consequences of the internet are not accidental. Sergey Brin, the co-founder of Google, said at an event in 2010: “We want Google to be the third half of your brain.” The authors of the recent study interpret that claim to mean that Google blurs "the line between the knowledge contained in one's head and the knowledge contained on the internet". Therefore, the researchers remind investors to always be cautious.