Not Knowing What to Do With or Without Machine Intelligence: Evidence from a Natural Experiment Involving Retail Investors

Abstract

A significant portion of retail investors heavily engage in feedback trading, which is built on historical price data. As financial technologies lower individuals’ acquisition cost to these data, the abundance of (raw) information creates an illusion of knowledge for retail investors and boosts their overconfidence, which further induces them to trade too much. Against this backdrop, we investigate the impact of technology-enabled convenient access to financial data on retail investments. Our identification strategy exploits the sudden shutdown of Yahoo! Finance Application Programming Interface (API), which cut off the largest free price data access for retail investors engaging in feedback trading. We find that within one month after the API shutdown, retail trading volumes in stocks favored by those investors dropped by 8.6%-10.5%. The remaining retail trades became more predictive of future returns, suggesting less gambling-like behavior after the API shutdown. The study reveals a dark side of technology-led wider data provision to retail investors, and echoes regulators’ call to improve the financial literacy of retail investors.