3.9.1. The Internet

Investors, in general, and online investors, in particular, now make decisions in a very di fferent environment than investors in the past. They have access to far more data via the Internet. They often act without personal intermediaries. They can conduct extensive searches and comparisons on a wide variety of criteria. A critical and largely unexplored research question is how this di fferent environment affects the decision-making of investors (Barber and Odean 2001b).

Barber and Odean (2002) analyzed 1607 investors who switched from phone-based to online trading during the 1990s. Those who switched to online trading performed well prior to going online, beating the market by more than 2% annually. After going online, they traded more actively, more speculatively, and less profitably than before, lagging the market by more than 3% annually.

Reductions in market frictions (lower trading costs, improved execution speed, and greater ease of access) do not explain these findings. Overconfidence—augmented by self-attribution bias and the illusions of knowledge and control—can explain the increase in trading and reduction in performance of online investors.
