Swedroe: Investors Respond To Feedback

February 17, 2017

It’s been well documented that, on average, retail investors are “dumb” money. For example, on average, the stocks they buy go on to underperform, and the stocks they sell go on to outperform. Sadly, investors even manage to underperform the very mutual funds in which they invest.

And, by the way, men do worse than women (due to excessive confidence in skills they do not have), investment clubs perform even worse than individuals (proving that when it comes to investing, more heads may not be better than one), and those who trade the most tend to underperform by the most (again, likely due to overconfidence).

An interesting question is whether the performance of individual investors could be improved by providing them feedback and showing them how poorly they were doing. Steffen Meyer, Linda Urban and Sophie Ahlswede, authors of the study “Does Feedback on Personal Investment Success Help?”, sought the answer to that question. Their study is a working paper by SAFE (Sustainable Architecture for Finance in Europe), a cooperation of the Center for Financial Studies and Goethe University.

Survey Says ...

The authors note that most banks don’t provide investors with feedback on their investment decisions. In fact, a survey they cite found only one out of 120 banks in Germany regularly informed their customers about the risks, costs and return of their portfolios over the prior year.

It found all other financial services providers fulfill only their statutory duties and provide information on holdings, volumes, current market prices, position value and, in some cases, the position’s purchase price. There is no information on the portfolio other than its current total value.

A skeptic would say it’s easy to explain this failure to report: If they provided that information, they believe their clients would stop some of the bad behavior, leading to lower profits for the banks.

 

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