What Is The “Technology Effect” And How Can It Impact Investing Behaviors?

May 11, 2015
Behavioral Finance, Question of the Day, Research, Investing, Stocks, Current Events

This research caught my attention as I thought back to my first investment.  I had just gotten my first paycheck and walked down to the broker, Quick and Reilly (yes, this was the days before online trading) and invested in a high-tech company called CheckRobot (I even found this press release from 1988, a year before I invested).  Note the use of techno-speak in the release:

The agreement with IBM calls for the development of a hardware and software interface between the CheckRobot device and IBM`s 4680 point-of-sale system. The joined products will be demonstrated at the Food Marketing Institute trade show in May.

“It is very significant for CheckRobot to receive IBM`s cooperation and assistance in this development effort,“ said David F. O`Connor, CheckRobot`s vice president of engineering and manufacturing. “This level of cooperation will accelerate our development schedule and ensure that we take advantage of the IBM system`s performance and functional capabilities.“

In case you were wondering, my early lesson in investing in technology stocks cost me about $600 (and saved me thousands more by discouraging me from investing).  So, now to the research (out of the University of South Dakota), which was conducted on college students to tease out what factors made investors choose one investment over another.  The answer….

Overall, in the cases where the participants were told that a given decision had had good results in the past, the participants were likely to make that decision — but only if it was associated with some high-tech verbiage (there was no statistically significant difference between the high- and low-tech solution when they weren’t reported to have had success in the past). The researchers called this bias “the technology effect” — “Signals of high performance trigger the effect,” they write, and it “is more likely when the technology invoked is unfamiliar.” The equation was simple: “Evidence” of past performance plus a high-tech premise equaled investor exuberance.

Also interesting to see that “evidence” of past performance also played a role in their decisions, which is ironic since a standard disclaimer on investment products that show performance data is “past performance is not indicative of future results.”  Who said we are rational beings?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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