Equally troubling, the spread of Internet stock trading has made it possible for every Tom, Dick and Mary to become a day-trader. Using the Internet, investors can buy and sell shares for commissions in some cases 99 percent less than those charged in ye olde days of full-service brokers (in, say, 1992). At little effort or
expense, they can draw on company announcements, Securities and Exchange Commission filings, press reports, analyst recommendations and, of course, the opinions of other online aficionados.
What these wired do-it-yourselfers generally cannot do is beat the market. Researchers at the University of California, Davis, report that individual investors “pay a tremendous performance penalty for active trading.” In a study of 66,465 households with accounts at a large discount brokerage firm from 1991 to 1996, management professor Terrance Odean and finance professor Brad M. Barber found that the most frequent traders underperformed the market by a stunning 6.5 percentage points. “Our central message,” the professors wrote, “is that trading is hazardous to your wealth.”
One reason may be the propensity of investors to sell the wrong stock. In a study of 10,000 brokerage accounts, Odean writes, “I find the surprising result that, on average, the stocks they purchase actually underperform those they sell. This is the case even when trading is not apparently motivated by liquidity demands, taxloss selling, portfolio rebalancing, or a move to lower-risk securities.” This Wrong-Way Corrigan approach to trading persists despite-or perhaps because of-the growing volume of that makes it easy to anywhere, anytime has created its own difficulties. information available to private investors. Novices report being paralyzed by the vast array of mutual funds from which to choose, equaled only, it seems, by the vast array of publishers and others who provide information about mutual funds. Consider the change this represents. Not long ago, the trick was simply getting information in the first place, but the age of information scarcity is long gone. Gaining information is already easier than figuring out which information to pay attention to, and the future promises such unprecedented informational abundance that we’ll practically have to work just in order to avoid it. What will matter, in other words, is the quality of your filters.
Which brings us back to two dimensions of life in the previous era: expertise and personal service. Wealthy investors, for example, may hire personal data-editors or researchers, instead of bankers and brokers. Or they may hire well-educated assistants, the way people do in Hollywood, to administer their finances (if not their lives) using information technology. If knowledge is power, why not pay somebody to harness that power for you? (Of course, “agents,” the perennially heralded smart software that will go out on the Internet and find us just the right pair of shoes based on our lifestyle and color preferences, may usurp this function, or provide it to those who can’t afford an actual human being.)
The final scary aspect of the financial brave new world is the disappearance of money itself-at least in tangible form. Digital cash is right around the corner, potentially replacing the coin of the realm with “money” that exists only on “smart” cards, hard drives and other electronic media. Many of the implementations
of digital cash now being discussed lack one of cash’s primary characteristics-anonymity.Greenbacks let you buy anything without anyone knowing who you are, but most forms of digital cash would carry an indication of provenance, in some cases acting more like checks than dollar bills. Coupled with the extraordinary amount direct marketers seem to know about us, this potentially revolutionary change gives some of us the digital willies.
Only time will tell whether the main leveling effect of technology on money will be to make us all equally its slaves.