Limiting internet searches for investors ups likelihood of a stock market crash

By Maja Garaca Djurdjevic

April 29 2021
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Internet searching does not exacerbate investors’ biases – instead, it facilitates their ability to access and analyse information, new research has revealed.

Limiting internet searches for investors ups likelihood of a stock market crash

New research by RMIT University appears to have overturned a previous truth that unrestrictive internet searches could lead to an overvaluation of stocks and up the chances of a stock market crash. Instead, researches have now suggested that the direct opposite, imposing limits on internet searches for investors, actually increases stock market crash risk by 19 per cent.

According to lead researcher Dr Gaoping Zheng, a lecturer in finance at RMIT, the study showed that search results influenced decisions, a challenge to previous thinking that they merely justified people’s existing ideas.

“Until now it’s been widely thought that unrestrictive internet searches result in bias and an overvaluation of stocks, but that would mean restricting search would decrease stock market crash risk. Instead, we saw a significant jump,” Dr Zheng said.

“This suggests internet searching does not exacerbate investors’ biases – instead, it facilitates their ability to access and analyse information.”

In arriving at its findings, the research by RMIT looked at the ramifications on the stock market following Google’s unexpected withdrawal from mainland China in 2010. It found access to unbiased information about companies’ performance – aided by unrestricted internet search results – led to investors making more informed decisions.

This, Dr Zheng said, has implications for Australia, following Google’s recent attempt to withdraw from the country.

“While China has alternative search engines, their results are concentrated and an identical search on Google would show vastly different results,” Dr Zheng said.

“Our research emphasises the importance of access to diverse results, and if Google did decide to withdraw, it could have a destabilising impact on the economy.”

Dr Zheng pointed out that following Google’s withdrawal, Chinese investors were likely to be shown positively biased information from websites hosted in China. She noted that restricted searches also gave firms opportunities to hide adverse news from the public.

“Google was more likely to show content from international websites such as Bloomberg, Reuters or The New York Times, which are free from political constraints to talk about what is happening,” she said.

“If managers withhold negative news, investors are less likely to mitigate their misconceptions and biases surrounding a certain stock,” she said.

“Let’s say I believed that eating carrots could cure cancer and searched the internet to confirm this. An unrestricted search would correct my bias because I would find that carrots are not actually a cure for cancer,” Dr Zheng concluded.

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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