WIRELESS INVESTORS & APATHY OBSOLESCENCE.

• Author: Ricci, Sergio Alberto Gramitto

ABSTRACT

This Article discusses how a subgenre of retail investors makes investors' apathy obsolete. In prior work, we dub retail investors who rely on technology and online communications in their investing and corporate governance endeavors "wireless investors. " By applying game theory, this Article discusses how wireless investors' global-scale online interactions allow them to circulate information and coordinate, obliterating collective action problems.

TABLE OF CONTENTS I. RETAIL INVESTORS' APATHY A. The Cost of Retail Investors' Participation Within a Non Cooperative Context B. The Pro-Rata Benefits for Investors. C. Retail Investors' Governance Inconsequentiality Within a Non Cooperative Context II. RETHINKING RETAIL INVESTORS' APATHY III. WIRELESS INVESTORS & SOCIAL CAPITAL IV. RETAIL INVESTING IN THE AGE OF INFORMATION A. The New Information Infrastructure B. Individual and Collective Benefits of Online Communication and Coordination V. THE INCREASING INFLUENCE OF WIRELESS INVESTORS A. Emergence of Social Norms B. Investing and Corporate Governance Social Norms C. Corporate Governance Engagement and Political Participation D. Communities and Norm Generation E. Risks and Guardrails CONCLUSION INTRODUCTION

Today virtually anyone can make investment decisions from their phones. Investing apps allow the average citizen to buy, hold, and sell shares at their fingertips. (1) Conversations about investing and finance have permeated the internet with an increasingly large segment of society engaging in discussions about securities. This is bridging the gap between financial markets and retail investors--individuals typically holding a relatively small number of shares who are not professional investors. While all shareholders of public companies are typically granted the right to vote in director elections and on other significant items, the trend has been that this power is scarcely employed by retail investors. (2) Traditional investor apathy and free riding have hindered retail investors' engagement. (3) Retail shareholders (4) with small investments typically leave the burden to vote to larger shareholders. (5) Many commentators deem investors' apathy for the best. Some view retail investors as unequipped to make informed decisions compared to the sophisticatedly trained Wall Street professionals. Retail investors have been considered "irrational and uninformed noise traders, who distort stock prices and harm market functioning." (6) This common belief is grounded partly in retail investors' lack of investing education and partly in structural barriers to information and inability to communicate and coordinate. (7)

Despite being the economic beneficiaries of corporations with governance rights, (8) retail investors have traditionally remained apathetic in yielding shareholder voting power--casting, on average, 31% of their shares despite the overall rate of voting reaching nearly 80%. (9) On average, only 11% of retail investors choose to vote, with this likelihood increasing for shareholders with a larger stake in the company, when financial returns have been poor, and when Institutional Shareholder Services (ISS) opposes shareholder-sponsored proposals up for a vote. (10)

Retail investors have been traditionally studied through their buying and selling behavior to determine approval or dissatisfaction of public companies, rather than voting decisions. (11) This "satisfaction or sell" mentality has conventionally been considered rational. The rationality is grounded in the consideration that diversified retail investors with small stakes in large companies will have, at most, a negligible impact on the voting outcome. So, the cost of staying informed and intelligently voting largely outweighs any impact a retail investor's participation may have. (12)

Apathy is typically explained through two interrelated rationales--one of great cost and one of little benefit. In this Article, we offer a supplementary, but probably paramount, explanation of retail investors' apathy, drawing on game theory and using the uber-famous prisoner's dilemma. The prisoner's dilemma paradigm shows how, if retail investors can communicate and coordinate their actions, apathy becomes irrational. (13) In other words, retail investors' apathy is a suboptimal behavior, explainable with the bygone inability to communicate and coordinate their actions.

A specific type of retail investor is leading the paradigm shift that obliterates traditional obstacles to retail investors' engagement in corporate governance. In prior work, we refer to these retail investors as wireless investors because of their use of technology and online communication. (14) Wireless investors tend to invest using app native trading platforms and gather information about investing via social media and online fora. (15) Most wireless investors are Millennials or GenZ'ers. Millennials are considered digital pioneers, while GenZ'ers are "digital natives," with the latter's immersion in technology being more substantial than any generation that has come before them. (16) The two generations' shared immersion in the technological world has created similar values when choosing where to invest finances, for whom to vote in both local and national elections, and where to call their workplace home. (17) Millennials and GenZ'ers develop an online connection that spans from investing to igniting social, environmental, and political change. (18)

Informed by the generational features and aptitudes characterizing wireless investors, this Article sheds new light on investors' apathy using game theory. It also discusses how wireless investors can shift retail investing paradigms by obliterating traditional collective action problems along with investors' passivity. Part I of this Article surveys retail investors' apathy. Part II proposes a new framework to investigate retail investors' apathy, based on game theory. Part III examines wireless investors' ability to overcome traditional collective action problems through the creation of social capital online. Part IV discusses retail investing in the age of online communication. Finally, Part V explores wireless investors' power to shift social norm paradigms relating to investing and voting.

1. RETAIL INVESTORS' APATHY

   Retail investors traditionally consider the cost of their corporate governance engagement on an individual basis, the benefit of their corporate governance engagement on an individual basis, and their ability to determine an outcome on an individual basis. Small retail shareholders reason that other shareholders, typically with larger equity interests or a duty to vote, will make the best decisions for all shareholders. (19) Such an approach is grounded in the consideration that the opportunity cost of educating themselves to make informed voting decisions outweighs the benefit of doing so. (20) This phenomenon is known as free riding. (21)

   Even when retail investors acknowledge that other shareholders' voting preferences result in outcomes that do not align with their own interests, retail investors typically refrain from voting as they believe that their vote would not be sufficient to vary the outcome. In other words, retail investors who act on an individual basis fear that their engagement with corporate governance would be costly and in vain. As a result, retail investors typically stay passive even if their interests differ from those of the institutional shareholders that are most likely to drive the vote. (22) Retail investors free ride on institutional investors' engagement and voting, and, as a measure of last resort, they rely on the "Wall Street walk" as their exit option.

   Retail investors' behavior and beliefs with respect to apathy are grounded on a false premise--they consider themselves as necessarily solo actors. Thinking exclusively on an individual basis leads retail investors to refrain from exercising their power on corporations. It is this reasoning bias for individualism that informs retail investors' apathetic behavior. Different from the prisoners in the famous prisoner's dilemma, however, retail investors are not required to act in a context in which communication and cooperation are prohibited from the outset. (23)

   In this Part, after reviewing the traditional reasons typically associated with investors' apathy, we look at apathy through a new lens--questioning the bias that retail investors' decisions ought to be made in a non-cooperative environment, like those of the prisoners facing the prisoner's dilemma. (24) But wireless investors are overcoming that bias and are on the verge of causing a lasting paradigm shift in corporate governance.

   1. The Cost of Retail Investors' Participation Within a Non-Cooperative Context

      With respect to costs, the apathy of retail investors is largely credited to the fact that, for most, it is simply economically rational to stay uninformed and uninvolved in shareholder voting. (25) The financial incentives to monitor management paired with the costly process of being informed and actually voting tilt the cost-benefit analysis to the side of "too costly," resulting in deference to management or reliance on institutional investors to make decisions for all shareholders. (26) In other words, without coordination among shareholders, great costs result in retail investors' passivity.

      Voting costs are multifaceted--chief among those are "the cost[s] of becoming informed, that is, of acquiring, processing, and assessing the implications of relevant information" as it relates to the vote. (27) To vote intelligently, information must be gathered as to the nature of shareholder rights in addition to that of "the underlying business of the issuer." (28) An investor must evaluate this information, bearing an additional cost. (29) In fact, "[b]oth gathering and assessing ... information is costly." (30) In the current system, absent mass communication...