Executive Summary for the MSc Thesis:
Internet use and stock market participation in the European Union:
the moderating effect of sociability and cognitive ability.
June 2019
Thijs van Stegeren
Address: Frederikstraat 22C1
ZIP code: 9724 KC Groningen
Phone number: +31633137663
E-mail: T.J.van.Stegeren@student.rug.nl
Student number: S1999249
Supervisor: Dr. M. M. Kramer
This paper investigates the investment behavior of elderly European households. This topic is relevant for several reasons. Recent trends increasingly shift the responsibility for financial decision making towards elderly households. For instance, current austerity measures lead to diminishing public pensions, while private pensions increasingly move towards defined contribution plans which allow investors to allocate their pension investments themselves. Additionally, older adults own a large fraction of all financial wealth, because they have acquired their wealth over a longer lifespan than other age groups. Meanwhile, the European population is aging rapidly. Forecasts by the European Statistical Office (Eurostat) indicate that between 2015 and 2050, the median age in Europe will increase from 42.4 years to 46.7 years, and that life expectancy will increase from 76.4 years to 82.7 years. The demographic shift will further strain public retirement provisions, as the ratio between working age adults and elderly adults declines from three in 2015 to two by the year 2050. All in all, elderly households are increasingly in charge of their financial decision making, and their decisions are more impactful than in prior decades.
The specific focus of this current research is whether elderly households invest in the stock market or not. Economic theory suggests that investors should hold at least some stock in their investment portfolio. Additionally, the stock market has historically outperformed other investment types. Nevertheless, very few households hold stock. If stock returns are high, and financial management is increasingly important, why do households hold out on investing in the stock market? Researchers have investigated this so called “stock holding puzzle” since the 1980s, yielding several potential explanations. Early research emphasizes the importance of monetary costs of investing, and whether investors are willing to take financial risks. More recent research has investigated the information requirements for stock market investing.
The internet has greatly increased the availability of financial information. Stock market participation rates reflect this influx of financial information. In the 1980’s and 1990’s, when most households acquired their first computer and started using the internet, stock market participation rose tremendously. Currently, older adults increasingly take to the internet as well. Eurostat finds that internet use for Europeans aged 65 to 74 has quadrupled from 13% to 52% between 2007 and 2016. Therefore, I was curious as to whether the increase in internet usage has helped older adults gain access to the stock market.
Clearly, the internet is not the only source of financial information. Therefore, I wanted to investigate whether the internet affects the tendency to use other information sources. Households tend to gather investing advice from their social circle as well, for instance. It was not clear in advance how the internet and social networks impact one another. On the one hand, an investor can gain information on online investing from their social network. Furthermore, the investor can apply real-life social skills to gain information from online social networks. These arguments suggest that internet and sociability reinforce each other. On the other hand, the amount of information required for investment is limited, and expanding the number of information sources might overwhelm the investor with superfluous information. This suggests that the two information sources are competing substitutes.
since internet users are especially prone to information overload I expected cognitive ability to be particularly useful for online users.
I investigate these topics using data from the Survey of Health, Aging and Retirement in Europe (SHARE), which is an international household panel that tracks social, health-related and financial data of individuals aged 50 years and older. In my research sample, 11.7% of households directly hold stock.
First, I find that internet users are more likely to invest in the stock market than non-users. The difference between the two groups is 3.3%. Elderly internet users benefit from the online access to low-cost stockbrokers and financial information. Even among internet users there are differences in participation. When taking into account how skillful respondents are at using computers, I find that the most skillful group of computer users is 6.5% more likely to invest in stock than non-users. Second, I find that people who have an active social life in clubs and organizations are more likely to invest in the stock market. The difference between the two groups is 1.8%. Social networks seem to provide valuable investment information, or older adults enjoy discussing investment strategies among friends.
Third, I find that online information and social information act like substitutes. If a respondent has one source of information available, adding a second information source increases stock market participation by less than 1%. Therefore, learning how to invest online is more effective for investors who lack a social network.
Fourth, I find that cognitive ability facilitates stockholding. An investor of high cognitive ability is 2.2% more likely to invest in the stock market than an investor of average ability. Cognitive functioning allows an investor to process investment information and also increases patience and risk tolerance. Fifth, I investigate how cognitive ability impacts the benefits of online investing. Surprisingly,
cognitive ability has a smaller impact on stockholding for internet users, than it has for non-users. Apparently, after a certain point information is no longer an issue and different potential obstacles grow more relevant. For instance, high transaction costs, lack of trust in the financial system, or risk aversion can even deter well-informed investors.
Besides holding stock directly, one can invest in the stock market through indirect means, such as individual retirement accounts and professionally managed mutual funds. I find that information availability and processing capability have a positive impact on indirect forms of stockholding as well. Since indirect stockholding is more prevalent than direct stockholding, the impact of information on indirect stockholding in absolute terms is larger than for direct stockholding. However, the relative impact of information is larger for direct than for indirect stockholding.
