Google makes you overconfident…and ruins your performance

A couple of months ago I wrote about an experiment that showed that people who are able to access information on Google become overconfident. Now, another group of researchers has done a series of experiments to examine how google influences our investment behaviour. And it doesn’t look good.

Traditionally, retail investors got most of their financial advice from their broker, banker, or from family and friends. No longer. Today, most retail investors get their investment information from the internet or online apps. But if you recall my previous article linked above, you know that by being able to look stuff up on google, people started to think they were more knowledgeable than they really were. The fact that you have tons of information at your fingertips blurs the lines between what you think you know and what you really know.

Adrian Ward and his colleagues designed a series of experiments with some 500 volunteers and asked them to participate in different investment tasks. But before they did that, they had to answer a couple of general trivia questions to earn starting capital for their investments. The trick: Some participants were instructed to answer the quiz without the help of the internet while others were instructed to google answers if they felt unsure.

Once the participants had earned their starting capital, they could bet some of it on their performance as investors. The more confident a participant was in her ability as an investor, the more she would likely bet on her performance. The chart below shows that participants who were allowed to look up answers to the financial quiz on Google turned out to bet more on their investment success, reflecting a higher degree of confidence in their investment capabilities.

But if you then look at the performance of their investments the participants who were allowed to use Google may have been more confident, but their actual performance in the investment task was worse. The authors of the study don’t really know why the performance is worse. It could be because the ability to use Google reduces the attention and diligence put forth in the investment task. Thus, being able to use Google would make people rely more on heuristics and other mental shortcuts that lead to lower performance. But never mind the actual mechanism in this specific experiment, we know that overconfident investors have worse performance in real life simply because they trade more and pay higher fees that they cannot compensate with higher returns. So independent of the returns in this experiment, the effect of Google and the internet on the investment of retail investors seem likely to be negative.

The behaviour of investors who are allowed to use Google

Source: Ward et al. (2022)