Broker Notifications Push Investors to Higher Risk

investors who receive alerts from brokers on their investments are induced to take higher risk, according to a study by the Center for Tax and Accounting Research.

Attention triggers induce investors to take higher risk, concluded the Center for Tax and Accounting Research.

Using the trading records from a large broker that sends standardized push messages to retail [individual] investors’ cell phones, researchers found that investors who received these messages made derivatives trades bearing a significantly higher leverage—taking on higher risk—compared to investors who had not. Investors who were men, younger and less experienced particularly increased their risk-taking after receiving an attention trigger.

The researchers focused on contracts for difference (CFDs) on a large set of blue-chip stocks for the study. CFDs are financial contracts between investors and a financial firm that replicate the performance of the underlying asset; the broker allows investors to select a leverage from one to 10 for each individual trade. A leverage of two induces a loss of 2% if the underlying asset of a long trade declines by 1%. These contracts are not available in the U.S.

The messages sent to investors reported publicly observable information on a specific stock. They did not contain fundamental news but consisted of large price changes on a single day, streaks of price changes over several days or earnings report dates.

The average increases in risk-taking were 19.9% for men and 7.3% for women. The researchers said the study supports previous psychological literature that suggests young men are more susceptible to exogenous (outside) attention triggers. Trading experience was found to reduce the impact of the attention triggers on risk-taking. More experienced investors typically make fewer behavioral errors and use more sophisticated trading tactics.

The researchers also considered stock characteristics, including analyst coverage, the total of associated news events, trading volume and turnover. Overall, analysis indicated a stronger impact of attention triggers on risk-taking for stocks that tend to attract more individual attention.

Looking at the content of the messages, the study’s results suggest that the increase in risk-taking is primarily driven by the attention trigger. The increase in risk-taking was similar for messages that reported a negative drop in stock price and those that reported a positive jump.

Source: “Attention Triggers and Investors’ Risk-Taking,” by Marc Arnold, Matthias Pelster and Marti Subrahmanyam; SSRN, May 2020.