Robinhood’s Not So Merry Men and Women

By now, the online mobile stock trading platform Robinhood has become part of everyday conversation. As of 2/1/2021, a Google search of Robinhood returns a staggering 225M hits!

If you read many of the news stories, one can assume if you pick the right stocks at the right time, one can instantly be a millionaire with little risk and all upside gain. Of course, the focus of the story is the stock GameStop, AMC Movie Theatres, and other well known companies such as Nokia and Blackberry.

As always there is more to the story.

In a Wall Street Journal article last week (January 23, 2021) by Shlomo Benartzi, called “A New Reason Investors Shouldn’t Try to Time the Market,” Benartzi shares the most recent studies regarding why moving in and out of stocks is a losing strategy.

A new study from Ilia Dichev (Emory University) and Xin Zheng (University of British Columbia) found active investors that tend to ‘chase stability’—trying to minimize volatility by market timing—they end up doing the exact opposite as they invest in stocks after past volatility is low and before future volatility is high. The end result is high capital exposure when volatility is increasing. They also found that the volatility of the actual investor experience is nearly 50% higher than the corresponding volatility of stock returns.1

Robinhood claims their platform was “built for mobile-first customers, has expanded access to the financial system and enabled millions of people to learn and invest responsibly.” A spokesperson for Robinhood suggests that their platform acts as a market stabilizing force during market volatility since Robinhood customers are buy and hold investors.

Academic Brad Barber (University of California Davis) discussed how the activity on Robinhood Markets Inc.’s platform, which allows users to trade securities like stocks for free, now accounts for roughly one-third of all retail trading volume in the stocks that are most popular among Robinhood users.2 As critics point out, apps like Robinhood generate so much active trading they gamify the investment experience, appealing to sensation-seeking investors. For instance, Robinhood updates stock values within the app every few seconds— the changing numbers even spin like a slot machine. To make the experience even more like a game, when investors take certain actions, confetti falls across the screen in celebration.3

And what’s the result? Investors are more likely to engage in herding, which leads to short-term price spikes and longer-term price declines. Within a month, the most popular stocks on Robinhood tend to decline between 5% and 9%. One likely reason is that short-sellers often bet against those same stocks.3

Thus, apps like Robinhood may not be the best platform for investors since it reinforces the worst human behavior when it comes to investor behavior. It is not so “merry” to speculate and gamble with one’s hard earned dollars.

You can read the entire Wall Street Journal article here. Please know, the article may be behind a paywall and for subscribers only.


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