Sharing the wealth

Helping novice online share traders to make decisions could level the playing field for market newcomers.

Alex Richardson is a PhD candidate and associate lecturer at the ANU College of Business and Economics. Although his background is in computer science and user-centred design, he has lately been investigating how novice traders perform in a simulated online share trading environment. As part of an Australian Research Council funded project, Richardson has been collaborating with senior colleagues from ANU and other universities on a study that diverges from traditional thinking on how people behave in financial markets.

“In the real world, it tends to be more behavioural agent-based models, where people will follow a gut reaction or feeling and do what they feel is right at the time, which may or may not be the best decision to follow.”

“Behavioural studies have shown that the old phone trading used to be better for traders because they tended to think more about what they were doing, and they had less of a tendency to react on impulse.”

“These days anyone can go online and trade. They don’t have anyone else to help them with the decision process. They’re free to do whatever they like.”

This freedom comes with a catch. Digital technologies make online trading possible, but they also accelerate the entire market, meaning that trading decisions need to be made faster than ever before. Traders must make decisions at speed, meaning that experience and the ability to process information quickly are crucial attributes. Where does this leave the newcomers to the online share market?

To answer this question, Richardson and his colleagues designed a computer-based experiment that would test how novice traders performed in a time-constrained situation. More than 40 undergraduate students were chosen to take part in a high-speed ‘game’ where success would result in real monetary rewards, while failure provided an opportunity for people to learn from their mistakes.

“It’s impossible to model something like the ASX and the New York Stock Exchange,” Richardson says.

“Those things are pretty much beyond anyone’s capability at the moment. What we made instead was like a clean room situation where we had complete control over the financial market.”

Participants had their cognitive abilities tested, before taking part in the trading game which involved calculating the value of two different shares based on dividend information. Each game period lasted for five minutes. Different participants were given different pieces of information. The researchers watched intently as some traders made rapid decisions, like computer game players. Some of these people had been shown to have high cognitive abilities, others were clicking because they didn’t understand. Some players traded more slowly, taking their time to consider the available information. Common sense would suggest that the slow and steady traders would win this race – and the research findings supported this.

“People who tended to trade more frequently than other people also tended to have worse performance,” Richardson says. “The people who sat back and made careful decisions overall tended to perform better.”

Some of the participants who had scored highly on the cognitive tests and traded rapidly did perform well, but overall, people’s success rate deteriorated as the frequency of their trading increased. In effect, people who rushed made more mistakes.

“When people are put under time pressure, they often have to change their decision-making processes. If that leads to stress, this often has an affect on confidence or the ability to choose the best behaviour for a given situation.”

“It offered them some bounds to the decision-making process, but it also offered them an idea about the possibilities,” Richardson explains. “Then they could think more about their strategies, they could think more about what’s happening in the market, how the average share price moves higher or lower, and how that affects what they do.”

The findings were clear. All participants performed better when given decision support, increasing their financial rewards.

The research team is continuing its investigation into how decision-support systems can assist novice traders making their first forays into the market. Richardson says the team’s results already provide some pointers.

“Don’t act on impulse. Think before you act. It’s important. Sometimes it’s great to trade quickly to take advantage of an opportunity, but don’t give up common sense to be the first to get in on a particular price.

“A lot of people go for hot tips or investment advice, but how people use this information is questionable. Accurately consider information that is given to you, before you jump in the deep end.”

As for the future, Richardson says the project is a chance to level the playing field, so that ‘ma and pa’ investors can perform well, even if not to the extent of a professional broker. His goal is to develop software-based decision-support tools that will assist people in online trading.

“Lots of people find it fun. They have a great time trading shares. As soon as they start losing money, the fun factor disappears. If we can actually help them out, supporting them in such a way that they can apply the knowledge, then over time they should have a better overall chance of making some money.”


^^

ANU Reporter
Winter 2006