My feed of Instagram reels and YouTube shorts is full of videos featuring financial influencers(finfluencer) telling the world at large that it is easy make quick money from the stock market. Recently, I came across a video in which a 13-year old claimed to be the world’s youngest successful options trader on an influencer’s YouTube channel, saying that she earned “36-40%” annually from options trading.
The projection of this teenager’s success feeds into the overall story of how easy it is to make money of the stock market, something that many finfluencers quietly backed by stock brokerages, have been saying over the last few years.
But the question is why do people buy these stories without the availability of any data to back them. While the supply of such content is explainable, what explains the demand?
Before answering this question, let’s take a slight deviation and get into the story of an Australian called Belle Gibson. As Alex Edmans writes in May Contain Lies—How Stories, Statistics and Studies Exploit Our Biases—And What We Can Do About It: “In 2009, Belle suffered a stroke. Tests to find the cause uncovered devastating news: Belle had an advanced brain tumour and only four months to live.” She would die before turning 21.
Conventional treatments were no good with chemotherapy making her sicker. But Belle fought back using natural methods. “Weak from the chemotherapy, she forced herself to exercise. She started meditation. She ditched meat for fruit and vegetables,” writes Edmans. And she had a miraculous recovery.
Having discovered this secret, she now wanted to tell the world at large about it. In August 2013, she launched an app called The Whole Pantry, which had delicious recipes, wellness guides and lifestyle support as well. At the end of the year it was declared as Apple’s best food and drink app. And Belle saw professional success over the next couple of years.
But she never had cancer. Her story was a lie and everyone believed her without checking the facts. Or as Edmans writes: “This is a classic example of confirmation bias. We accept a claim uncritically if it confirms what we’d like to be true.” People liked the story. They wanted it to be true. So, they did not bother checking whether it’s true or not.
The same confirmation bias which took Belle’s career to great heights is at work when finfluencers’ flaunt their success and tell the world at large that it is easy to make money from the stock market. Their followers want to believe them and so, they believe.
In the process, three things happen: First, no one bothers checking whether the influencer actually made the kind of money they are claiming to. Of course, with no such data being available in the public domain, it’s not possible to cross check what the influencer has claimed to achieve.
Second, the followers want the story to be true, so they don’t bother asking a rather basic question: If this influencer has such a formula for success, why is he or she so enthusiastic about selling a financial course on the stock market. Why not just continue quietly making money using the formula or technique?
Third, the followers don’t look at the base rate of success, while trading in stocks or financial derivatives.
Data from the Securities and Exchange Board of India, the securities market regulator, shows that in 2022-23, 71% of those carrying out intraday trading in stocks lost money. In fact, when it comes to trading in financial options and stocks and after taking in the cost of trading, in 2023-24 nine out of ten traders lost money.
So, the base rate shows that a bulk of people carrying out trading lose money. Also, those who supposedly make money don’t make much money once transaction costs are taken into account.
But people don’t check out this publicly available data because they want to believe the story being sold. Also, even those who check out the data like to think that they won’t be on the losing side.
As Daniel Kahneman writes in Thinking, Fast and Slow: “We are…prone to an illusion of control…which makes us overly confident in our beliefs… The observation that “90% of drivers believe they are better than average” is a well-established psychological finding that has become part of the culture, and it often comes up as a prime example of a more general above-average effect.”
And this applies to investing and trading as well. Most of us like to think that we are above average and thus won’t end up on the losing side, even though the low base rate of success clearly shows that.
To conclude, these factors explain why so many finfluencers offering clear, crisp and confident solutions to making money from the stock market, have been able to build such a huge following and themselves become rich in the process, even though data clearly suggests otherwise.
Vivek Kaul is the author of Bad Money.
