Kirsty Williamson

The literature

What does the literature tell us about the safety of online investment that might shed light on information literacy and knowledge-building needs? The first issue concerns information overload, proposed by Langevoort (2002), Mezick (2001), Nicholas and his colleagues (2003) and Barber and Odean (2001) as a major problem for online investors. Barber and Odean postulated that ‘at some point, actual predictive skill may decline as information rises’ (p. 46). Nicholas and his colleagues studied digital information consumers, labelling them as ‘information players’. In colourful language, they described ‘a data-driven world’, with the Internet providing ‘loads of links, endless links, thousands of postings’, characterizing ‘the endless information journey with seemingly no destination’ from which information players will retain little information and have ‘no sense of knowledge building’ (Nicholas et al. 2003, p. 30).

A second issue emerging from the literature relates to the putative desire of online investors for immediacy and speed. Nicholas and his colleagues saw rapid speed of delivery as essential to ‘information players’, with real-time information being what everyone wants because it is the benchmark (Nicholas et al. 2003, p. 28). Also Barber and Odean postulated that the Internet’s facilitation of ‘comparisons of real time data’ leads to an emphasis on ‘the importance of speed and immediacy’, which they saw as influencing investors ‘to trade too often and too speculatively’ (Barber & Odean 2001, p. 48). On the other hand, at about the same time as Barber and Odean were writing, Mezick undertook a survey of ninety-six investors’ use of the Internet in relation to other information sources for investment information. This research found that speed was low on the list of the reasons respondents gave for using the Internet. Moreover, Mezick found that, while 59% of the sample used an online broker, there was an overwhelming preference for printed versions of what were called ‘narrative’ sources, which included newspapers, magazines and annual reports (Mezick 2001, p. 3). She considered this to be attributable to the older age profile of participants. After convenience, which topped the list of reasons for using the Internet, the second most nominated reason was to supplement other information sources.

A third issue raised in the literature concerns the level of risk-taking, or investing confidence, in relation to levels of information seeking. Along with Barber and Odean (2001), who saw the Internet as providing an illusion of knowledge and control, Langevoort proposed that well-informed investors can lose money through overconfidence. He saw them as tending to ‘overweight their private stock of information or inference’ (Langevoort 2002, p. 14). The work of Lin and Lee investigating ‘the determinants of consumers’ information search behaviour when making decisions’ (Lin & Lee 2004, p. 320) may provide some support for this view, although the researchers were not concerned with either ‘overconfidence’ or ‘financial loss’. Using a large sample from a database of consumer attitudes, behaviours and motivations associated with financial products, they found ‘that consumers who engage in more information search activities are more risk tolerant’ (p. 326).

While it seems unlikely that the answer is to discourage online investors from seeking information, the problem of overconfidence may relate to the proposition put forward by Barber and Odean that investors may not seek information with an open mind. Rather they may seek to confirm previously held opinions, for example, through Internet chat rooms where they can seek out like-minded investors (Barber & Odean 2001, pp. 46-7).

A fourth issue concerns the use of social or media networks for investment advice. Langevoort (2002, p. 13), leading US scholar working on investor psychology and securities regulation and also part of the international collaboration for the project discussed in this chapter, described ‘the contagion of excitement or panic’ generated by social contact. He based this conclusion partly on the key work of Shiller and Pound (1989), whose research found that direct interpersonal communication between peers is important to the information seeking and decision-making that precedes securities trading. This is in keeping with research findings in the human information behaviour field from the last few decades of last century to more recent times, that interpersonal information sources are frequently used by information seekers (Warner, Murray & Palmour 1973; Chen & Hernon 1982; Williamson 1995, 1998; Heinstrom 2002). Langevoort (2002, p. 13) saw the effect of social contact amongst investors as the most unexplored aspect of investor behaviour. Internet chat rooms are a recent phenomenon allowing social networking and thus providing further opportunities for interpersonal exchanges. Discussions about this issue include the contribution of the Chairman of the United States Securities and Exchange Commission, Arthur Levitt, who warned about Internet chat rooms in 1999. By that time chat rooms had become ‘a source of information or mis-information for many investors’. According to Levitt, chat rooms ‘have been compared to a high-tech version of morning gossip or advice at the company water cooler. But at least you knew your co-workers at the water cooler’. He hoped that investors ‘realize that if someone is waxing poetic about a certain stock, that person could well be paid to do it’ (Levitt 1999, p. 5).

Langevoort (2002) also wrote about the impact of the media in driving stock prices, even if there was no ‘new news’ about a company. Since that time, the volume of email spam associated with investing has burgeoned and, although unlikely to have the credibility of respected media, it could also be considered as a problem for gullible investors.

A fifth issue has already been mooted by the reference made by Nicholas and his colleagues to information players as having no sense of knowledge building. This resulted partly from what they saw as ‘promiscuous’ behaviour as they ‘flick’ and ‘bounce’ because of the wide choice of digital sources at the disposal of information players (Nicholas et al. 2003, p. 26). Bradley (2004) saw a similar problem, in that, while the web provides up-to-date information, its presentation on screen (often with hyperlinks) may prevent readers from developing sense of the full document. Adding to these observations, recent research, particularly that which is focused on students, is beginning to link the non-linear presentation of information on the World Wide Web with superficial understandings resulting from the use of that information. For example, Cohen (2006, p. 174) pointed out that the typically non-linear, interactive and multimedia formats of the Web present ‘a range of challenges for the reader that may require new comprehension strategies for deriving meaning’. Another view was expressed by Lorinc (2007), who drew on research about information overload and multitasking. He pointed out that the human brain is ‘ill equipped to function effectively in an information-saturated digital environment characterized by constant interruptions’. Thus the multitasking often undertaken on the Internet may not result in good information processing as ‘the science of interruptions suggest our brains aren’t nearly that plastic’. The brain research frequently cited has been undertaken by the Poldrack Laboratory at University of California Los Angeles and includes the work of Foerde, Knowlton and Poldrack (2006).

Questions to be addressed

Emerging from the literature discussed above, the following questions are addressed by this chapter, using data from the Australian project (including the pilot study) wherever possible:

Before embarking on a discussion of these questions, an overview of the philosophy and method for the project is presented.

Philosophy and method

Williamson (2008) provides an in-depth discussion of the philosophy and method for the project. The researchers adopted a mixed-method approach with regard to both research philosophy and method but tried to do it ‘in a thoughtful and defensible manner’, as Greene and Caracelli (2003, p. 94) have urged. The research carried out by Greene and Caracelli found that ‘inquiry decisions are rarely, if ever, consciously rooted in philosophical assumptions or beliefs’ (2003, p. 107), implying that much research using mixed methods—and I would add, single method research—appears to be atheoretical. The research adopted the Morse (2003) approach of first recognizing the ‘theoretical drive’ of the project—whether its principal purpose is to discover, find meaning or explore (interpretive/qualitative) or to measure or test (positivist/quantitative)—and then respecting the assumptions of both paradigms. The theoretical drive for the online investment project was qualitative (interpretivist), with quantitative data being used to provide the ‘broad picture’ of investing and information-seeking behaviour before an in-depth exploration of a range of questions during the interviews. The two components were treated as separate, though related. The answering of the questions posed for this chapter relies more heavily on the qualitative data.

The quantitative component

For the quantitative component of the project, major Australian online investment companies, such as CommSec (the Commonwealth Bank online brokerage company) and Sanford Online, put a survey questionnaire up on their web sites. The Australian Shareholders’ Association (ASA) and the Australian Stock Exchange (ASX) both supported the project. As a result, the target sample of at least 500 respondents was easily reached and exceeded, with a total of 520 respondents.

The online questionnaire was developed and piloted late in 2005 and some minor adjustments were made before the survey was launched in 2006. Apart from questions designed to determine the demographics of the respondents, questions all focused on frequency of various types of online investment activity and information source use.

As we were only interested in a broad picture from the quantitative data, analysis involved simple frequency counts on an Excel spreadsheet. Apart from gender, where males outnumbered females five to one, the other demographic results tended to cluster. The majority of the sample was aged between 40 and 69. Sixty-seven per cent had a university, college or postgraduate degree and almost 50% had a total household income of at least $80,000 (Australian). On the other hand, 3% of respondents had an income of less than $20,000 and about 16% had an income of between $20,000 and $50,000.

The most important outcome of the survey was that we had a large number of potential interviewees. Almost 200 online investors offered to be interviewed and provided personal details, giving us a large and varied pool of people from which to build a balanced purposive sample, as discussed further below. The wide geographical spread of respondents to the survey also made it easy for us to claim that this is a truly nationwide Australian study. All states were represented, but, as expected, the major cities, Sydney and Melbourne were most heavily represented (about 18% each).

The qualitative component

Within a constructivist framework, ethnographic method was used for the project and the technique emphasized was the individual interview, which was used in combination with participants’ responses to the questionnaire.

A pilot study was undertaken for the qualitative component and provided interesting results in its own right. These are documented extensively in Kingsford Smith and Williamson (2004) and are used as an example of a study of the use of ethnographic techniques in constructive frameworks by Williamson (2006).

The sample

Twenty-six individual online investors participated in interviews. They were purposefully selected from the more than 200 people who, in the online survey, volunteered to be interviewed. The starting point for selection was geographical location, but selection was also based on a wide range of other variables. It included investors who undertook various types of trading—Australian standard share trading (at various levels of frequency) and trading with margin loans. There were representatives from every age and income group and a higher proportion of women than in our original sample. The sample also represented a range of levels of information seeking and use.

The interviews

The interviews, lasting between one and two hours, began in September 2006 and most were completed by May 2007. Some took place in the homes of participants, some in workplaces, and others in university or library premises. The researchers took care to meet the requirements of the Ethics Committee of the University of New South Wales, obtaining in each case informed consent from participants, including for the audiotaping of the interviews.

The first questions related to types of trading and reasons for investing online, including perceived level of risk-taking, and subsequent questions were about types of information seeking (Internet and other), the perceived qualities of information sources and views about issues such as information overload. The remainder of the questions mostly concerned investment decisions and processes (for example, the customer/broker agreement and awareness about warnings and disclaimers on brokers’ web sites).

Before the interviews, the researchers prepared a profile of each participant based on the individual’s questionnaire responses. As the interviewers moved through the questions, the part of the profile that related to the question being asked was read out to the participant. This was very useful, not only because it set the scene for in-depth questioning, but because it enabled us to check the level of accuracy of the survey results. As a result, we have gathered good data to critique the effectiveness of our questionnaire—an exercise which should prove salutary for other questionnaire developers. These are briefly discussed later in this paper, but more fully in Williamson (2008).

Data analysis

The audiotapes of the interviews were transcribed by an experienced transcription typist. In the case of the information questions, one of the chief investigators and a research associate were engaged in the analysis. The analysis initially involved the identification of the themes, which were to some extent determined by the questions asked. The data within each theme were then analyzed for categories and key quotes. A ‘voice sheet’, so named because it includes quotations (‘voices’) of participants, was then set up. Each sheet was organized according to theme, subdivided by categories into which illustrative quotations were entered. An overview of the data for the voice sheet was then written. An example of part of a voice sheet for the theme, ‘Information Overload’ (without the summary and with just of few of the quotations included) follows in Table 12.1.

Findings

The findings from the five questions, outlined above, are discussed below, together with the relevant literature.

Information overload

As suggested by the literature, there was awareness of the issue of information overload on the part of project participants, with various degrees of anxiety being expressed about it by some. The major categories were: the unconcerned (who often talked of their information-seeking strategies to explain why they felt this way); the concerned (who appeared simply worried); and the concerned with strategies for dealing with the problem (most often the use of investment analysis software). The three quotes below illustrate these three different stances:

What are the implications for information literacy? It is clear that investors would benefit from assistance to develop their capabilities in identifying the most appropriate information from the vast array of information now available to them. Literature from fields such as investor psychology literature and finance, as well as research focused on information seeking and use, identifies information overload as a key issue for online investing information seeking. Strategies for dealing with information overload should be high on the list for future information literacy education for online investment.

Predilection for speedy access to information

As raised by Barber and Odean (2001) and Nicholas and his colleagues (2003), the desire for rapid delivery of information was strong amongst project participants. Almost all participants saw ‘speed of access’ as one of the important characteristics in defining what they considered to be key sources of information for online investment. Nevertheless, the concept of speed of access sometimes differed among participants; it also appeared to be associated, in the minds of some participants, with ‘convenience/ease of access’ (considered important by all interviewees). As one interviewee noted, it was ‘exactly the same thing because ease and speed pretty much ties straight in’ (male, country New South Wales, 60-69).

There was some dissonance here, with some participants considering speed to be ‘probably not the top priority’ (female, Sydney, 40-49) and a few thinking that speed was not a good idea, for example, the participant who ‘would never rush into anything’ (male, Perth, 70 +). Nevertheless, slow speed of access came in for particular criticism.

This last comment and the discussion in the next section appear to indicate that information literacy for online investors needs to include patience in building knowledge to avoid making decisions based on the most readily available and speedily deliverable information. This conclusion is based partly on the strong views from the literature, for example, that of Barber and Odean regarding ‘the importance of speed and immediacy’ in encouraging investors ‘to trade too often and too speculatively’ (2001, p. 48).

Relationships between perceptions of levels of risk-taking and analysis

The researchers asked participants two different, but at least partially interrelated questions about their perceived levels of risk-taking and systematic analysis using information. This was an attempt to gauge the perceived (and perhaps actual) level of safety involved in the investment processes of the sample. The question about systematic analysis in particular revealed data about participants’ approaches to information seeking and use and, therefore, also indicated something about their information literacy in the online investment context.

We attempted to obtain a quantitative answer to both questions initially: ‘yes/no’, in relation to systematic analysis and ‘conservative, moderate and high’ with regard to risk-taking. Although the answers were not always clear-cut, it is interesting to note that all the interviewees who thought that they did not do systematic analysis, or did not do it all the time, were also moderate or high risk-takers. There was a remarkable correlation in this regard, although only four investors described themselves as low risk-takers, with another describing himself as ‘moving from high to low’ (and admitting that he had lost money in the past) and another as a conservative to moderate risk-taker. The six latter participants thought that they undertook systematic analysis before making an investment decision. Another interviewee described his risk-taking as ‘used to be high, now low’ because of losses he had suffered and believed that he did systematic analysis sometimes.

With regard to systematic analysis, the quotations below give a flavour of the various approaches and views. Some interviewees believed that the use of charts made their analysis systematic.

Others saw their own analysis as systematic, but doubted that other online investors undertook it. The first of these was employed in the financial sector; the second was a participant who had taken up online investing after she retired and had worked hard to be well-informed. Her view of others was formed through her extensive contact with other investors through the six investments groups/clubs she belonged to.

Then there were those who felt that they undertook systematic analysis at least some of the time and others who admitted to being not all that systematic.

Nevertheless, most interviewees who thought they did systematic analysis felt confident as a result and reported that they were making good returns, not surprising in the bull market then prevailing. Even an investor who admitted to having sustained significant losses at times felt confident in the analysis he did.

I believe I’ve got a set of rules where I tick the boxes and say, yes this is positive, this is positive…And I was getting about a 70% success rate with it, unless something bad happened [which it had on several occasions it seemed], I’m always confident. (Male, urban fringe Western Australia, 40-49)

It is important to emphasize that these views about whether they undertook systematic analysis using information are the participants’ self-perceptions and can only be taken as an indication that most participants felt that their information literacy was adequate. It is also important to heed the caveats found in the literature—that well-informed investors can be overconfident (Langevoort 2002) and that part of successful online investment may be associated with the degree of open-mindedness with which they seek and assimilate information.

Influence of social and media networks

The survey questions concerning interpersonal sources (including social activities associated with investing) and the uses of traditional print and electronic media produced results that were not entirely validated by the qualitative component. Responses to the questions about interpersonal sources of information, which revealed most of the 520 participants to be infrequent users of these sources, produced a result that was contrary to expectations established from the literature. As indicated above, our expectations arose from research findings in the field of human information behaviour which have shown that interpersonal information sources are frequently used by information seekers (for example, Chen & Hernon 1982; Heinstrom 2002). Moreover, as also mentioned above, Langevoort (2002) and Shiller and Pound (1989) had found that social contact influenced the decisionmaking of investors. Again the pilot study for this research (Kingsford Smith & Williamson 2004) had found that interpersonal and social communication was important in information seeking; with that small sample of nine interviewees, we found not only informal chats with family and friends but also participation by several interviewees in investment clubs. It was, therefore, surprising to find a different result in the main study, as indicated in Table 12.2 below.

As indicated in Table 12.2, 62.8% of survey respondents said they rarely or never received information or advice from family, friends or acquaintances.

The interviews revealed that this result was questionable. Because the researchers had prepared a profile of each participant based on that individual’s questionnaire responses, it was possible to critique the findings from the survey. (For detailed discussion of this critique, see Williamson 2008.) From the profiles we knew the way the question about interpersonal sources of information had been answered previously by each of our interviewees. The finding was that family, friends and acquaintances were used more frequently by participants than appeared to be the case from the survey responses of those people. (This was not the case for investment clubs which were included in the same survey question and so could not be separated.) This discrepancy could be the result of the commonly mentioned disadvantages of questionnaires, for example, people not reading questions carefully, the different interpretations people bring to the same question, or the lack of clarity with complex questions where no further explanation can be offered, as it can be in an interview. On the other hand, it could be that some participants had been reluctant to admit that they exchanged information with interpersonal sources. Moreover, some participants worked in the finance industry and had highly placed professional contacts who were also personal friends or family and whom they may not have considered to be encompassed by the survey question.

Other participants made it clear that they had forgotten to mention certain interpersonal sources. For example, a participant, who answered ‘once every three month’ in the survey, said:

There were several participants who discussed investing with family and friends not officially qualified in the financial field, but claimed not to be influenced by them.

Then there were interviewees who talked to family and friends and admitted to finding this useful and to being influenced by them.

The result is that, as with the pilot study, almost all participants in the major study talked with others who were also investors—particularly family members, friends and work colleagues. The issue here is the extent to which online investors are judicious in the use of information from family, friends and acquaintances, given the possibility of misinformation. Do they check pieces of information before using them? Do they take account of the likely reliability of informants? Recent researchers (Lloyd-Zantiotis 2004; Lloyd & Williamson 2008) have emphasized that information literacy research needs to extend beyond a focus on text. In a different context, Williamson and Asia (2009) have discussed the importance of information literacy in connection with interpersonal communication with family and friends.

The major difference between the pilot findings and those of the major study related to group social intercommunication. In the pilot study, this ranged from casual conversations between two people to regular, semi-formal meetings of groups in pubs and coffee shops, to more formal discussion groups with a common interest in investing, and on to investor clubs where members contributed to a common investment fund. The most structured form of social communication was participants’ attendance at meetings of formal organizations, such as the Australian Shareholders Association (ASA) which holds regular meetings with a formal agenda but provides an opportunity for socializing after the meetings. In the major study we found considerable evidence of casual conversations and a number of mentions of attendance at ASA meetings. There was, however, not much participation at the levels in between, particularly in investment groups or clubs, with the exception of one interviewee who described herself as belonging to six ‘investment-type groups’, although a few people had thought about the idea or aspired to joining a club.

It is interesting to note the observation of another participant on this topic.

Only one participant had visited online bulletin boards or chat sites, which she said she did when she was bored.

This is the kind of investor behaviour described by Langevoort (2002) when he spoke of ‘the contagion of excitement or panic’ generated by social contact. The information literacy issues are similar to those discussed above, with regard to communication with family and friends, particularly the need to question and check information.

With regard to ‘ramping’ (efforts to drive up stock prices), the outstanding example in the research was the bombardment of investors with email spam. Since there was almost universal trashing of this by interview participants, it seems that, at least with this sample, there was high awareness of the danger of this kind of communication.

Impediments to knowledge building using Internet resources

The kinds of problems regarding the characteristics of web-based sources of information that have been raised in the literature recently were not directly investigated in the project, although there was some evidence of participants ‘flicking’ and ‘bouncing’ (Nicholas et al. 2003, p. 26) between web sites and even computers. For example, one participant said that she kept two computers on, one giving quick access at all times to the latest share prices and the other for information searching. The last quotation above also indicates the short attention span that the Internet, with its high-speed information delivery, encourages. On the other hand, we had a participant who learnt to be an investor from scratch, carefully building her knowledge through library books. She had gone from being a person on a low income (all her life) to being an extremely high income-earner after she took up investing in her sixties. Her systematic approach to learning about investing was impressive.

The issue of the building of knowledge in the Internet era requires considerable further research and is relevant to all areas of everyday-life information seeking and beyond.

Conclusion

Emerging from the present study are some of the areas where online investors may need specific assistance with information literacy if they are to build their knowledge successfully: dealing with information overload; balancing their need for speedy delivery of information with making considered investment decisions; undertaking systematic analysis using information; and using advice from interpersonal sources of information judiciously. Although most interviewees in the study did not have complete trust in information sources, there was a higher level of trust than might be warranted. This is also an important information literacy issue. Given that many investors attend investing workshops or talks presented by formal investing organizations, incorporating some information literacy education into these initiatives could be of great benefit. Certainly, lawyers involved in research in the regulatory area consider good information use as extremely important for safe online investing.

Some of the issues raised in this chapter, for example, the need for information seekers to develop strategies to deal with information overload, are also relevant to other everyday-life information-seeking areas. The fifth question, which concerned the building of knowledge through Internet sources of information, is highly relevant to other topic areas, given the importance of Internet information sources (Savolainen 2004), and for learning generally. Savolainen explored users’ ‘interpretative repertoires’, providing critical analysis of perceived usefulness of Internet sources as well. Many questions have been raised recently about the effect on understanding that could result from the non-linear presentation of information on the Web and about the impact of multi-tasking which is now so prevalent in the Internet Age. It is crucial that further research is undertaken to investigate these questions.

Acknowledgments

Thanks are also due to Jen Sullivan and Marion Bannister who provided able research assistance for the project.

References