Low interest rates? Bored traders stuck at home? A new study has come up with an alternative explanation for the surge in speculative activity.
Smartphones.
A study circulated by the National Bureau of Economic Research found the use of smartphones increases the purchase of riskier and lottery-type assets, and chasing past returns.
It was written before the recent spike in trading of companies such as GameStopGME,+67.87%and AMC EntertainmentAMC,+53.65%,in which retail investors have attacked the short positions of many hedge funds. The online brokerage Robinhood is now the number-one app on Apple’s app store, an the source of the speculative demand, Reddit, is number-two.
The researchers looked at two large German retail banks that introduced trading applications for mobile devices between 2010 and 2017. For over 15,000 clients, they observed not just the transactions but the specific platform used for each trade.
The researchers were able to look at the same investor during the same month. Smartphones increase the probability of buying so-called lottery stocks by 67%. The use of the devices increases the probability of buying assets in the top 10% of past performance by 12 percentage points.
Worryingly, once they start using smartphones, they also increase their risk chasing on non-smartphone platforms.
Another finding is that the risky behavior continues up to 10 quarters after the initial use of the smartphone app. What is also startling is that the researchers weren’t looking at particularly young and inexperienced traders — these German investors were, on average, 45 years old with nine years of experience investing.
But one interesting finding is that nudges — the prominent feature of stocks that have experienced big moves — do not seem to drive activity. Results were strong across all asset classes and not just for those that are featured in the smartphone app.
The working paper was written by Ankit Kalda and Alessandro Previtero at Indiana University, Benjamin Loos at the TUM School of Management in Munich, and Andreas Hackethal at Goethe University Frankfurt.