The digital investor and the 'ostrich effect'

The internet has certainly given investors much more immediate access to information about their portfolios, investment research and investment markets. It has also enabled us to conduct immediate online transactions.

However, the internet, of course, brings positives and negatives for digitally-aware investors. For instance, these investors can more readily overreact to short-term market movements. They can be swayed from their long-time goals by the day-to-day”wall of sound” of online investment/economic/political news and investment commentary.


And investors trawling through the abundance of online information can fall in the trap of ignoring negative information – known by behavioural economists as the “ostrich effect”.

Another related pitfall involves deciding on a course of action and then searching online for evidence to support that action. Behavioural economists tag this as “confirmation bias”.

Given the internet’s impact on almost everything to do with our finances from our personal banking to our investing, Vanguard in the US is publishing a series of research papers under the title The Digital Investor.

The just-published first paper in the series raises the broad issues facing online financial dealings and information before looking at the take-up of the take-up of online access for investment products.

How we handle online information and online access to financial services can go to the fundamentals of sound investment practices.

“With the wealth of information available online, individuals have the opportunity to take the reins on their own finances,” the researchers comment. “But how are they combing through this abundance of information and making financial decisions?”

The first issue of The Digital Investor notes that 83 per cent of Vanguard’s retail investors in the US are registered for digital access to their accounts. The adoption of online access is even higher with new investors with Vanguard.

Perhaps not surprisingly, the research found a “pronounced age effect” on the willingness of new clients with Vanguard to register for online access. Older investors are less willing to go online. For instance, investors aged 65-74 were 11 per cent less likely than investors aged 25-34 to immediately register for online access.

Interesting though, the researchers say that this research together with other financial industry research suggest that this is not so much a matter of investors becoming less interested in using technology as they age. It is more a factor of not having had access to this technology throughout their lives.

“Therefore,” the researchers conclude, “as today’s digitally savvy young investors become older, rates of digital adoption among older households will likely climb. Of course, it remains to be seen if new technology, such as virtual reality, might eventually replace today’s web and smartphone access.”


Written by Robin Bowerman, Head of Market Strategy and Communications at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

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