The internet age has seen the volume of data available to investors grow at a tremendous pace.
The tech tools that have sprung up to help investors make sense of all the information are becoming more influential by the day. A team including Jillian Popadak Grennan, a finance professor at Duke University’s School of Business, was the first to study the effect fintechs have had on available information and how investors use it. The researchers found the new tools can benefit investors and the market, but can also distort and create bias in traditional sources of information. Because of this feedback effect, investors who stick with what is familiar are actually worse off than they were before these tools existed.
Grennan discusses her findings – which she presented at the Federal Reserve Bank of Chicago – in this Fuqua Q&A.
Q: What does fintech mean in this context and why does it matter?
Fintechs are the data intelligence tools designed to streamline information for investors. They do that in different ways. Some aggregate financial news, some evaluate and rank existing financial advice, and some mine data to condense masses of complex information into a buy or sell recommendation. There are so many fintech firms now; it’s important to know if this technology is beneficial or if it’s just the next snake oil salesman. An ideal financial market is one in which prices fully reflect available information, providing accurate signals for investors to allocate capital. So we need to know whether fintechs are contributing to that ideal.
Q: What effects are fintechs having on how investors find and consume information?
We studied investor internet histories and found fintech aggregator sites are taking the place of traditional financial analysis. Investors are using fintechs as a substitute for reading original content. It’s similar to the behavior other studies have found in the way people consume news. They’re going to news aggregators but don’t click through to the actual articles. Same thing here, except in the financial markets we see financial consequences because people are putting their money behind that behavior.
We reviewed more than a million financial blog posts from between 2010 and 2017; and we looked at how 290 fintech firms aggregated information from that same period. We found that in a given month, the average investor views 16 financial blog posts in less than seven minutes. Investors who visit a fintech aggregator are 31 percentage points less likely to also visit an original-content website. Investors who visit both spend 5 percent less time and review 17 percent less pages on the original content sites. This suggests fintechs are attracting the attention of everyday investors and changing the way they find financial analysis online.
We also found investors are better informed about prices in areas where fintechs focus. That suggests analysts' information is being replaced by more precise information aggregated from these non-traditional sources. But while this may save investors time, it also distorts the incentives of the analysts who produce financial information.
How does that distortion occur?
We found significant decreases in analysts' accuracy for the equities covered by fintechs. Because people are paying more attention to the fintechs that are doing the dirty work for them, it’s drawing attention away from traditional information providers and lowering their incentives to create the most accurate information. So if you’re only using those traditional sources of information, suddenly you’re at a disadvantage.
We thought that by being able to see who the best analysts were, that people would potentially start following them, and that these new fintechs would be a way to reestablish them as the thought leaders. That isn’t happening, and that is surprising.
What can investors, regulators and fintech firms themselves learn from this research?
Overall, we find fintechs help investors to stay better informed. By de-biasing the data for investors, these fintechs can prevent a lot of common mistakes people make. They help investors incorporate useful information from social media while weeding out the bad advice online. Our review of the 1.3 million blog posts across the 20 financial blogs that make buy/sell recommendations shows that most of the time, the market-adjusted returns to bloggers' recommendations were negative at an investment horizon of 6 or 12 months.
Still, this research is the first to illustrate to any governments that seek to regulate fintechs more closely that the technology is providing a very useful service. And for the fintech firms that are building all of this technology, or the institutional investors that are trying to do this in-house, we show that they will need to constantly update their algorithms for synthesizing this information. Because of the feedback effect between fintechs and traditional information producers like analysts, even the standard data will continue to change, as the role of analysts in the market continues to diminish.