The Devil You Know: A Survey Examining How Retail Investors Seek Out and Use Financial Information and Investment Advice

Everyday, people across the United States make decisions that will affect their financial futures — e.g., borrowing money to buy a house, go to college, or start a business; investing in the stock market to save for retirement; using check cashing services or payday lenders rather than accounts at banks or credit unions for day-to-day banking needs, and the like. Traditional tenets of financial economics and investment theory assume that people make fully rational, wealth-maximizing financial decisions. The efficient market hypothesis (EMH), for example, is built on the idea that stock market participants are rational economic beings, always acting in self-interest and expertly trading off costs and weighing benefits, mindful of statistically correct probabilities and marginal utilities. In the real world, however, financial decision-making is as much about Keynes’s “animal spirits” as it is about weighing probabilities. This is because real people exhibit decision-making biases and routinely fall short of rational choice norms, as has been extensively documented psychologists, experimental economists, and now neuroscientists. These biases and departures from rationality speak to our human nature — to the role that emotions play in decision-making; to our cognitive limitations; and to our use of heuristics, or decision-making shortcuts, especially when decisions are complex or time-pressured. Biases and departures from rationality also are linked to persistent misperceptions and mistakes. For retail investors (individual investors who trade for their own accounts), mistakes may include excessive trading; failing to diversity portfolios or using naive diversification strategies; over-extrapolating from past returns, or excessive risk-taking. For some scholars and legal systems (including the federal securities law investor protection regime), education is thought of as a key strategy for dealing with departures from rationality. Under this approach, investors get smarter over time by learning from their own mistakes and the mistakes of others, and by getting help from expert sellers of financial goods and services. Others scholars and systems are of the view that investor education, while important, may not work as efficiently or effectively as one might hope in reducing mistakes, especially in markets where investors have to make complex, time-pressured decisions. This article summarizes the results of a survey of approximately 1,000 retail investors who were asked about their information-seeking behavior — i.e., how they search for and use information and investment advice when trying to educate themselves in order to make investment decisions. The survey reveals four key insights into investor education. First, people want to educate themselves before making investment decisions: All but a handful of respondents said that they seek out and use information, tools, or advice (or some combination thereof) when preparing to buy, sell, or hold an investment. Second, respondents have three clear favorites for pre-transaction research — i.e., (i) their chosen financial intermediaries; (ii) trusted family members, friends, or others in the respondent’s social or professional circles; and (iii) the business and financial press. Third, trust and perceived credibility matter: Most respondents said the perceived credibility of a source is an important factor in deciding whether to seek out or use pre-transaction research from that source. Fourth, respondents ranked their chosen financial intermediaries highest with respect to perceived credibility; other stakeholders (including government regulators) did not fare nearly as well. In addition, using cross-tabulations, the survey also revealed a number of statistically significant differences in information seeking behavior when responses are sorted based on gender, confidence in investing skills, comfort with financial risk-taking, and age. To place these survey findings in context, this article first examines the choice architecture, or decision-making environment, of modern financial markets. Then, after reporting on survey results, the article considers the strengths and weaknesses of the current disclosure-based securities law investor protection regime. Finally, citing survey findings and research from the behavioral sciences and neuroscience, the article recommends an expansion of the fiduciary standard as well as tweaks to mandatory disclosure rules.