Recent research reveals a troubling pattern: social media users tend to make worse investment decisions than those who stay offline. They trade more frequently, take on excessive risk, and often believe they know far more about investing than they actually do.
The culprit? A dangerous gap between what researchers call “subjective knowledge” (what you think you know) and “objective knowledge” (what you actually know).
1. The share-without-reading trap
One recent study revealed something that would be amusing if it wasn’t so alarming. Researchers at the University of Texas found that people who share articles on social media often believe they’re knowledgeable about those articles’ content, even when they haven’t read them.
Think about it: When you hit that share button on a financial article, your brain does something sneaky. It convinces you that you’ve absorbed the information simply because you’ve passed it along. The University of Texus study revealed that investors with the biggest gaps between their perceived and actual knowledge maintained dangerously high exposure to stocks.
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2. How Google makes you overconfident
The problem extends beyond social sharing. Another recent study revealed what researchers dubbed the “Google effect.”
When people use the internet to answer investment questions, they tend to attribute that knowledge to themselves. Even more concerning, they often forget they relied on Google in the first place.
This manufactured confidence leads investors to take on greater levels of risk, believing they possess expertise they simply borrowed from a search engine.
3. The cost of online overconfidence
The financial consequences are measurable and severe. A Journal of Financial Planning study by researchers from Texas Tech University and Auburn University found that social media users were significantly more likely to make 10 or more portfolio trades per month.
That’s a trade every two trading days.
These hyperactive investors weren’t just trading blue-chip stocks. They gravitated toward highly risky microcap and penny stocks, chasing the next viral investment tip. History shows that investors who trade this frequently underperform the market.
Perhaps most troubling, research from The Ohio State University revealed that overconfident investors were far more likely to raid their retirement accounts early.
Among the 5% of investors whose confidence most exceeded their actual knowledge, 37% took early withdrawals from retirement accounts. Compare that to just 5% of genuinely knowledgeable investors making the same costly mistake.
Those early withdrawals come with hefty penalties and can devastate your retirement lifestyle. Yet overconfident investors pulled the trigger “without understanding [the] possible consequences,” according to researchers.
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4. The closed-mind problem
A May study in the Journal of Business Research added another piece to this puzzle. Researchers from France’s École de Management de Normandie found that people whose perceived knowledge exceeded their actual knowledge weren’t just overconfident. They were closed-minded.
These investors showed a “tendency to select and process information in a biased manner” and were “less open to new alternative viewpoints.” In investing, where adapting to new information can mean the difference between profit and loss, this mental rigidity becomes particularly expensive.
What you can do today
I’ve been investing and offering investment advice for more than 40 years. I’ve made a couple of million dollars in the markets, and one thing I’ve learned — more than once — is not to conflate good markets with good knowledge.
There’s an expression on Wall Street that goes, “Rising tides float all boats,” and it’s never been more appropriate than it is today. Stocks have been rising for years now, leaving many investors feeling they’re smarter than they actually are.
But trust me when I tell you this: What the market giveth, it can also taketh away. Stated a bit less politely, today’s genius is tomorrow’s idiot.
Remain humble. Keep some powder dry. And when times are good (like they are now?) think about taking some money off the table.
Also recognize that even if you’re Warren Buffett, things are going to happen that you didn’t see coming and are totally beyond your control.
Bottom line? Next time you see that “can’t-miss” investment opportunity in your feed, remember that the real opportunity might be in closing the app and opening a book on investment fundamentals. Your future self and your savings will thank you.
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