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* Paper written by André Gosselin published in "Finance et Investissements".
The debate about the consequences of Internet on the
financial markets and the investors' behaviours is far from its end. Would it be
only as far as the organization of the stock exchanges is concerned, Internet
could very well, one day, join together all the stock exchange markets of planet
in one virtual and electronic site.
Already, the parallel electronic markets like Island,
Instinet and Archipelago unceasingly process an increasing number of transactions,
without any human relay. It is not the case with the New York Stock Exchange and
the Nasdaq where, despite all the progress in the order automation, they are
still men and women who carry out the transactions.
In 2000, the New York Stock Exchange counted, on
its floor, more than 3000 persons executing an average of 671300
transactions per day. An electronic stock exchange like Island, counting
85 employees, executed 321007 transactions per day. The Internet network
is just starting reinventing our stock markets and reducing their costs.
As far as company management is concerned,
Internet also reveals nice promises. As it is well known, a great
proportion, if not the majority of the small investors do not vote on the
proposals submitted by the company directions to their shareholders.
Electronic vote on Internet could soon
change this situation and create a greater feeling of participation and
responsibility among the individual shareholders. They could vote on
questions about the companies' social responsibility as well as on
questions which relate to the good governance or the strategic
directions of the companies.
Internet would finally provide a platform
enabling the discussion of significant questions, the formation of
coalitions and should lead to a larger number of people to vote. On all
those subjects, the companies' democracy would be improved.
As far as investors and broker firms are
concerned, finally, Internet has created a revolution which radically
changes the practices and mentalities. Some commentators have raised the
idea that the Internet expansion in discount broking and among individual
investors is the main cause of the daily volume and volatility increase
of the stock market transactions; moreover, it is undoubtedly the most
significant factor at the origin of the creation of the speculative
bubble of the high technology securities at the end of the 90s.
illusions of control and knowledge
One thing is certain: Internet has made possible to
the investors to have access to a mass of information thousand times more
significant than all they knew before.
They can exchange opinions between them thanks to
discussion forums, read all the annual reports they want, consult news
archives and press releases about any company, know in real time the
price fluctuations, devote themselves to the technical analysis of stock
exchange graphs, select, using research filters, the securities which
answer the best to their selection criteria, and even more.
These quasi unlimited possibilities, which exceed
the anticipation scenarios of the most imaginative futurologists, arise
fears of several researchers. They are afraid of Internet causing two
phenomena well-known of the psychologists: the illusion of control and
the illusion of knowledge.
The professors of finance Brad Barber and
Terrance Odean have particularly insisted on these two phenomena. Their
studies provide elements of proof according to which the individual
investor, in particular the Net surfer, would be a beautiful case where
the illusion of control and the illusion of knowledge appear at high
level, with for ultimate consequence the demonstration of an harmful and
detrimental behaviour: the excess of confidence.
Result: the portfolio returns of the autonomous
investor suffer a lot from it.
As the researchers write it so well: "When the
individuals receive more information to make a forecast or to pose a
diagnosis, the confidence in their judgement increases much more than the
intrinsic veracity of this one."
In fact, it happens very often that the value of
some forecasts declines as information increases, because of the overflow
of information, also called information overload by some psychologists.
Terrance Odean and Brad Barber have showed that
the investors who forsake their adviser and their full-service broker to
take charge of their placements by themselves with an on-line broker
execute a larger number of transactions, and those ones have the
disadvantage of being more speculative.
While becoming more autonomous with Internet, the
investors have increased their portfolio turnover rate from 70% to 120%
per year. It seems, conclude the two Californian professors, that there
is a price to pay when one decides to forsake his broker to do everything
by himself though Internet, and this price is a fall of the portfolio
return.
It would be hazardous to claim that Internet is
the only raison why the investors are unsuccessful. Many
factors explain the traps into which they fall too often and the
setbacks that too much of them could have known. But it is necessary to
face facts: Internet has heightened some shortcomings the investors
have always got or it has acted as a catalyst in a decision-making process
which appears, altogether, poor.
To be continued in Part 2.
André Gosselin
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