In today’s Straits Times, the article, “Investor sues UBS over US$1.6m losses”, reports that a Taiwanese woman claimed bank told her US$2 million investment funds were protected where it was not.
Of course it again turned to the argument whether the claimant was savvy herself or whether she could communicate in English when she signed the documents.
Let’s temporarily put aside the argument whether the bank has mis-sold the client; How can a investor lost 80% of the capital and then turned around saying “I do not know what had happened”?
From my financial advisory experiences with clients, I guess this is probably due to what is called information overload.
In 2004, Julie Agnew and Lisa Szykman published a paper in the Journal of Behavioral Finance, revealed that people with a low level of financial knowledge suffer particularly from information overload.
Many are simply overwhelmed and cannot cope at all. This leads them to take the path of least resistance, the “default option” in investment planning.
While some investors inevitably have too little information, others have too much, which leads to panic and either bad decisions or trusting the wrong people. When people are exposed to too much information, they tend to withdraw from the decision-making process and reduce their efforts. (A lack of information, which one could call “underload” can have the same result, by the way, and is certainly just as dangerous).
In this case, client leaved decision making process to the bank but they failed to recognize that bank is a party to providing people with information about investment options, which may not be enough to produce rational and sound decisions.
Floundering in a maze of information opens people up to misselling and misbuying. As a result, investors get really lousy, unsuitable investments foisted on them. In short, investors land up with investments that are lucrative only for the seller, or which are simply easy to sell and no trouble to manage.