Analysis: research using eye-tracking technology found big contrasts between how different investors gather information

It's human nature to want to portray the best version of yourself to the outside world. Companies and their management teams are no different. Throughout the year, they disclose how their companies are performing and their plans for the future. There is always buzz and publicity around an earnings announcement as investors, current or potential, seasoned and novice, get an insight into the company's financials and make plans to buy, sell or hold the stock. The message that management puts out there is important. The nuances, the presentation, the word choice: "do we say we are 'improving'? Or does 'improving’ imply we weren’t good before?". The facts are the facts, but they know that small details matter. 

We don’t have to look far to find examples of earnings announcements where a relatively poor financial performance is presented alongside a positive press release. We would be surprised otherwise and, with ever-increasing accounting regulation, there is only so much leeway available. These acts of impression management, as they are known, can vary from the very mild (choosing a positive metric for the press release headline or using large font and bullets to make certain results stand out) to the more creative (distorting graphs or selectively choosing weak benchmark figures to make trends look stronger). 

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From RTÉ Archives, Richard Curran reports for RTÉ News on the first day of trading in Telecom Eireann shares in July 1999

Does it matter? Do simple presentation choices influence investors? To understand this better, we set up an experiment to track retail investors as they read and assessed a hypothetical company’s earnings announcement. Our hypothetical company’s financial statements showed poor performance over the last quarter. We created a press release to accompany it where we emphasised positive information through headlines, quotations and repetition. We used eye-tracking technology, which is commonly used in psychology and marketing, to better understand the information that retail investors are drawn to.

The results were interesting. Inexperienced retail investors can be influenced by very simple presentation choices in earnings announcements. Their eyes were drawn to big, bold headlines, italicised quotations, and any other emphasised content, irrespective of how informative it actually was. More worryingly, they spent relatively little time viewing the financial statements (the regulated part!).

Eyetracking results from the least experienced investor

When asked if they would invest in the hypothetical company, the more positively we had written the press release, the more likely they were to invest. Tracking the eye movements of relatively more experienced investors showed a much more sophisticated use of the financial statements. As expected, they were uninfluenced by the accompanying press release, irrespective of how positively it was written.

Eyetracking results from the most experienced investor

What does this tell us? In his book Thinking Fast and SlowDaniel Kahneman offers some insights from psychology. Inexperienced investors try to simplify the situation using mental shortcuts when overwhelmed with too much information and too little time. When a company chooses to headline only positive results, include a bullish quotation, creatively use graphs and tables, and repeat positive (and not negative) information, they are positively framing the announcement. The inexperienced investor is likely to view such a company more favourably, even if the underlying regulated (and extremely complicated) financial statements are neutral or worse.

The Financial Conduct Authority, the UK’s financial services conduct regulator, have also weighed in on this matter to highlight poor practices in the advertising of banking products. Just as with investors, inexperienced consumers sign up to credit cards based on a headlined ‘teaser’ rate, without reading the lengthy regulatory terms and conditions. 

These findings are especially caution-worthy given the ease with which inexperienced investors can participate in the stock market using no fee (and no advice) online trading platforms such as RobinHood, Freetrade and WeBull. Furthermore, the prevalence of investment commentary provided in online forums and blogs also puts the inexperienced investor at risk.

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From RTÉ Radio 1's The Business, The Irish Independent's deputy business editor Jon Ihle on how Wall Street reacted to the Gamestop stock play

Gamestop hit the headlines earlier this year when armchair investors urged others on the Reddit forum to buy stock in the company. Over the course of a week, the share price overinflated by 400% in response to the hype. By the time it had returned to normal levels, many amateur investors had incurred significant losses, while others had made substantial gains. The Reddit Rally, as it has come to be known, shows both the power and danger of online investing, which is only likely to increase.

Despite this, investing in the stock market does have its rewards and, as our research shows, there is no substitute for gaining experience yourself. Here are some of the steps you can take as a novice investor to protect yourself from poor decisions: 

(1) Read widely and take perspectives from multiple different sources. Consider information prepared by the company but also by informed outsiders (analysts, financial writers etc).

(2) Have a strategy in mind and stick to it: Investment amount, short or long term, exit options and timings.

(3) For major investments, get advice from experts with a strong track record. Experience really matters. While a few investment successes may give you confidence, consistency is what sets the experts apart.

The views expressed here are those of the author and do not represent or reflect the views of RTÉ