Do Retail Investors Really Have “Rational Investment”?
A recent study from New York University reveals the truth: “Most retail investors spend less than 6 minutes gathering information before making trading decisions.” The research team quantified the online investment behavior of individual investors, finding that most merely glance at price charts and news websites to complete their research, highlighting the speculative nature of human behavior.
DYOR? Retail Investors Place Orders After Just 6 Minutes of Research
The research team analyzed data from 484 U.S. households between April and July 2007, utilizing 8.5 million web clicks and 60,000 hours of internet activity left by retail investors using large brokerage firms to complete the study titled The Research Behavior of Individual Investors. The report indicates that the median retail investor spends an average of only 6 minutes researching each trade, with the average being 29 minutes:
- Over half of the research activities occur within 24 hours before a trade, particularly within a few hours on the trading day, with 95% of trades completed in less than 10 minutes after starting research.
It adds, “This shows that retail investors mostly make last-minute decisions rather than long-term plans, contrasting sharply with professional investors who conduct research for months.”
Only a Few Refer to Risk Indicators, Yahoo Finance is Most Popular
Contrary to many asset pricing theories that emphasize risk statistics, the study found that only a very small number of retail investors actively check risk information or indicators such as β values or volatility. In contrast, the most referenced materials include stock price charts, price trends, and simple news:
- Yahoo Finance is the most frequently used research website, even more popular than the brokerage firms’ own platforms and other professional tools.
Additionally, market analysts’ predictions and opinions are also popular types of information, but the proportion of those who delve into financial reports or dividend-related fundamental information is noticeably low, indicating that retail investors’ decisions rely more on intuition and visual information.
High Market Capitalization and Major News Capture Retail Attention
The research found that companies with larger market capitalizations or more volatile growth stocks are more likely to attract retail investors for research. For instance, Apple, which had not yet entered the top 20 companies by market capitalization, generated a significant amount of search traffic following the iPhone launch, becoming the most researched stock during that period:
- Companies in the top 20 by market capitalization generally receive 63% of individual stock research clicks. Major events, such as earnings announcements or merger news, also significantly boost the research interest in those companies among retail investors.
The researchers point out, “These patterns indicate that retail research behavior is closely influenced by market narratives and news events.”
Divergence in Investment Styles: Long-Term Analysts and Short-Term Speculators Coexist
Through further behavioral analysis, the researchers found significant differences in investment behavior and research styles among retail investors:
- Some investors prefer to delve deeply into financial reports and dividend details, while another group focuses on real-time news, comments in news sections, and price charts as short-term signals.
Notably, those who enjoy researching speculative stocks are more likely to use simplified information pages and neglect traditional financial data, indicating that these investors’ judgments may rely more on “intuition” rather than fundamental analysis.
Deconstructing Investment Behavior from Click Records: Do Retail Investors Need Investment Platforms or Entertainment Apps?
This study reveals not just data, but also questions the essence of retail behavior: “Are they investing, or seeking stimulation?” We observe that the research behavior of retail investors is often not to establish a rigorous investment theory but stems from a demand for rapid market responses, resembling a gambling mentality.
The authors of the original study extend the argument that if investment platforms are too complicated or professional, they may lose appeal. After all, for most retail investors, investment behavior resembles immediate entertainment with associated gains or losses.
This also reflects the contemporary design trend in fintech, where many investment apps emphasize simple interfaces, rich animations, and real-time trading feedback, successfully attracting more users. However, such designs may also weaken users’ awareness of risks and the depth of analysis, leading investment decisions to lean towards emotional and impulsive choices.
As posed by Dragonfly Limited Partner @TheOneandOmsy, a question worthy of reflection for the entire financial industry: Do retail investors truly need an investment platform that aids rational decision-making, or an entertainment tool that allows them to feel participation and react in real-time in the market?
Finding a balance between these two aspects will be a challenge that future investment platform designers and regulatory authorities must face together.
Risk Warning
Investing in cryptocurrency involves high risks, and its prices can be highly volatile, potentially resulting in the loss of your entire principal. Please assess risks cautiously.