Newsflash: Trading is Very Addictive
Not that this is news to anyone who trades, but:
"A small group of scientists, including some psychologists, say they are starting to discover what many Wall Street professionals have long suspected — that people are hard-wired for money. The human brain, these researchers say, responds to high-stakes trading just as it does to the lure of sex. And the riskier the trades get, the more the brain craves them.
French prosecutors have likened Mr. Kerviel’s trades to a drug habit. That is no surprise to Brian Knutson, a professor of psychology and neuroscience at Stanford University and a pioneer in neurofinance, an emerging field that combines psychology, neuroscience and economics, to examine how the brain makes decisions."
As someone who started on a trading desk, I can tell you from personal experience it is absolutely true. And my transition from trading to research reminded me the period of time when I gave up speedballing heroin and cocaine years ago -- the longing, that sense of emptiness, that yearning for the sweet, sweet high . . . hmmmmm.
Where was I?
Oh, yes, trading addictions.
In all seriousness, there is a definite adrenal rush to trading, and the highs and lows not all that different from what gamblers experience. The difference is casino gambling is nearly entirely random, whereas markets have some degree of non-random behavior, thanks to mean reversion and human behavior. Then there are the advantages of compounding.
The full article is worth a read . . .
>
Source;
Craving the High That Risky Trading Can Bring
JENNY ANDERSON
NYT, February 7, 2008
http://www.nytimes.com/2008/02/07/business/worldbusiness/07trader.html
Thursday, February 07, 2008 | 09:30 AM | Permalink
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I would have added the word 'very' to the title.
Primero!
~~~
BR: Done!
Posted by: JS | Feb 7, 2008 9:42:25 AM
Of course I was kidding -- I never stopped shooting up . . .
Posted by: Barry Ritholtz | Feb 7, 2008 9:42:52 AM
Two words: Operant conditioning
Posted by: zero529 | Feb 7, 2008 9:46:25 AM
can't wait for the people to migrate back here with the "BR used to shoot speedballs?"
Ciao
MS
Posted by: michael schumacher | Feb 7, 2008 9:48:34 AM
Hey, if they don't get my sense of humor, I say fuck 'em. They are liable to make crap up anyway.
The latest version of that is that some needledicks are saying I am in the tinfoil hat conspiracy grouping -- despite disagreeing with the claims of the plunge protection team (PPT) critics, and despite saying that BLS data isn't corrupt (merely bad)
If they have to lie to attack your arguments, it means you are hurting them . . .
Posted by: Barry Ritholtz | Feb 7, 2008 9:53:01 AM
Similar progression of "neuroeconomics" thoughts are in Jason Zweig's book "Your Money and Your Brain".
See 23 Aug 2007 of cnn.money.com article
http://cnn.money.com/2007/08/14/pf/zweig.
moneymag/index.htm
Yep, million of years of being hard wired the way we are sure works agains us in the market. At least for me.....
As always, your mileage may vary.
Posted by: spcwby | Feb 7, 2008 9:53:32 AM
wow, BR stopped shooting speedballs. No wonder there is a bearish sentiment around here... Get back on drugs and things would look rosy again. Come to think of it, that would explain a lot about some of the posts that the permabulls have been making recently...
Posted by: Snorri Sturluson | Feb 7, 2008 10:01:05 AM
Actually BR gives the appearance of being a lot more familiar with a Mama Leone's meatball than a Frisco speedball. Bon appetit.
~~~
BR: Once you kick speed, the weight just piles on.
When I am under 200 lbs, thats how you will know I'm back on the junk . . .
Posted by: cathompson | Feb 7, 2008 10:02:02 AM
barry..
i am new to trading, and i am not able to fathom who in their right mind will still be invested in this market...holding long positions in growth stocks?
i did read that pension funds, mutual funds etc make up almost 80% of the money in the market, which implies that its OPM which is at risk.
i do have some first had experience since recently i took my wife's retirement money from Tiaa-cref some mutual fund, and they claimed that its not a good idea to take money out of market. yeah right, just wait for it to completely melt like it happened during 2000-2003.
are these people not accountable? i am sure that the other retirement money, which is Retirement system of alabama is still fully invested in coporate bonds and stocks....and we have no say in that, other than starting a lengthy litigation that their money management skills are not good.
i know that a ton of retail investors are speculators with no sense of macro-economy and they are emotionally attached to their stocks....and they are alway "cost averaging down", but since they make a very small number(i think less than 5-10%).
i also know that many retired people are also managing their own money actively and they also behave like most retail investors.
if anyone knows this data, please share it. thanks
Posted by: techy2468 | Feb 7, 2008 10:05:25 AM
cathompson - Part of the problem with what you are talking about (funds, etc. still being primarily long in a clear bear market) comes directly from the way in which they are accountable. The mutual fund industry is based on the comparative performance standard (which I personally think is crap). Basically it means they are trying to beat some benchmark like the S&P 500. Doesn't matter whether that means you make or lose money on the year, as long as you do better than the benchmark you're considered a top performer.
Posted by: John Forman | Feb 7, 2008 10:13:35 AM
or say that "they" attacked you.....
Lying is the sport of choice of Wall Street. IT's just too bad that they manage to convince many people that they are not FOS.....
Ciao
MS
Posted by: michael schumacher | Feb 7, 2008 10:14:07 AM
What just happened? Saw the Dow make a U-turn north. Was it something Chambers said on CNBC?
Posted by: Karl Smith | Feb 7, 2008 10:19:16 AM
My initial reaction to the addiction thing is that the researchers have just created legal grounds for "rogue traders" to avoid prison time.
Beyond that, I would partly agree and partly not. Trading in certainly emotionally charged environments - trading desks, for example - certainly offer that potential given the stakes involved. For your average part-time trader, though, I don't think it's nearly as big an issue. There are a great many other psychological pitfalls for them. :-)
Posted by: John Forman | Feb 7, 2008 10:19:29 AM
techy2468,
Even though you are an uninformed, insulting son of a bitch, I will give you some good advice. You will probably ignore it because you seem to do the wrong thing frequently.
Stop trading, unless you have a hobby account and you are using money you can afford to lose. Buy mutual funds when the market is low and then hold them until it appears your account need to be readjusted. Then move to cash or move to another fund that looks more promising. Let experts pick the individual stocks. You can't win. Never put money into anything at a top. Foregone profits are easier to live with than hard losses.
Posted by: cinefoz | Feb 7, 2008 10:21:43 AM
Techy:
With regard to pension asset management, which I have done, you need to understand what the word, fiduciary, means. Asset management is largely a practice in risk management, not market timing. The advice from T. Rowe Price was prudent, considering the audience they are typically addressing.
In the context of "long-term" investing, a pure "market timing" approach can do significant damage to your average returns over time. The timing of your "exit" is not difficult to select. Where it gets tricky is timing your re-entry. Based on history, between 80% and 90% of the returns attributable to market performance comes from just 2% to 7% of the time in the market. To pick the "bottom" and those market jumps of four to five percent or more in just a handful of days is near impossible.
With the exception of those rare traders and fund managers that can successfully time the market, "time in" the market is favorable to timing the market, without regard for current market conditions...
Posted by: The Financial Philosopher | Feb 7, 2008 10:39:02 AM
Techy, Trading is a foreign beast to me so I won't go there, but the reason many of your long term investors fare so poorly is because of bad behavior, ie buying into a market timing culture that is pounded into our heads on a daily basis. Lipper did a study on equity mutual fund returns from 1984-2004 which showed that the average equity mutual fund returned 10.7% per year. The average fund investor in the same equity funds over the same time frame earned 3.7% per year. The difference (7% compounded per year!) in those numbers can be attributed to bad investor behavior, buying euphoria, and selling fear. Peter Lynch also spoke of this in one of his books, as it was a source of frustration that the average investor in his fund only captured a fraction of his great returns. Another reason for failure is lack of diversification, and asset allocation/rebalancing. I am actually quite bullish on this market for my long term portfolio, as lower prices can create better values. I realize that I can be wrong on the shorter term, but again my time horizon is very long term. Trading on the other hand is foreign to me, as my personality could not handle the day to day struggle of the markets. I think that the media today does a disservice because they fail to differentiate trading from long term investing, which to me is day & night.
Volatility, fear recession, euphoria..it's always been there and always will be. This time is no different.
Posted by: kk | Feb 7, 2008 10:43:31 AM
john forman - huh? Can't recall posting anything about mutual funds, particularly since I have never owned a longside open ender. I'm strictly a deep discount closed end buyer and also find grzzx helpful since I dont trade on margin.
Posted by: cathompson | Feb 7, 2008 11:06:18 AM
Like I tell my wife,
Better a bottle in front of me
Than a frontal lobotomy
Posted by: Ross | Feb 7, 2008 11:10:02 AM
Funny thing is I've only been reading the site for maybe ... 6-8 months. I finished that paragraph and took a minute to reflect: Barry used to shoot speedballs?!?, or is he just f*&(ing with us? Kinda disappointed when I found out he didn't, hehe.
Seriously though, I'm getting to the point of stuffing my savings in a mattress reading all of this stuff. At least the criminals that would break in and knock me over the head would honest about it (and could be arrested when caught.) WTH is going on in our system when there is almost zero accountability and incentive to do the right thing? Screw the recession, when do we start laying odds on the next revolution?
Posted by: zot23 | Feb 7, 2008 11:17:43 AM
thanks for the replies....greatly appreciated.
cinefoz: i have deposited 80% of my savings in a government bank in india, earning 9%.
and i am 100% in cash right now in my hobby trading account, would love to go short, but not comfortable.
to all those who raise the question of market timing: why is it so hard to know that being in stock market is risky for next 12 months, and its better to lose the 10% gain than take 30-40% risk.
was it really so hard to know that economy was slowing and risk appetite will decrease....leading to drop in price multiples...
was it really hard to know that Homebuilders were not a good buy in July?
was it hard to know that Financials are not a good buy in Oct?
was it not crystal clear that Technology cannot sustain p/e>40 because of slowing economy in Dec?
i am not talking about perfect market timing (like cinefoz claims) i am talking about going out of market when you feel the risk is getting very high.
unless USA really pulls out of slump in the next 3-4 months, i see very bad days ahead...consumer spending is going to slump big time just due to all the recession talk and lay off talks.
same thing with business spending.
lets assume that i am wrong, and all the signs are misleading about a long recession.....and the market jumps back 10-15% before i can re-enter.....
but what is the other scenario, the market tanks 30-40% if the long recession theory is right?
so whats wrong in missing out 10% gain to avoid 30% risk?
Posted by: techy2468 | Feb 7, 2008 11:21:31 AM
techy -
The advice here is well worth following. Do not screw around with your retirement funds. If you pick a fund with a good manager you'll be fine. It's their job to invest properly and if they do their job well you don't have to worry as much about bear markets. You just cannot time the markets. I back-tested a couple of my mutual funds against a couple different timing methods. The funds left in buy and hold easily beat the market. I have several funds that have grown at 12+ percent per year since '93 versus the s&p less than 8%.
As for "neuroeconomics," I get my fix from tournament style, no-limit holdem. Just as exciting and with less risk!
Posted by: Gary | Feb 7, 2008 11:28:23 AM
Sorry, I didn't get whether you were acknowledging traders "speedballing heroin and cocaine" or saying it doesn't happen. I can tell you it is still common (in NYC) - just maybe not as common as in the 80s.
WRT a post asking if the modern finance business is giving bad advice when they advise people to stay in the market: I say absolutely. Why tell even a young person to hold a stock fund right now when they face losing a significant percentage in the short term? I recently had a major mutual fund company's phone rep. imply (he could not actually advise, of course) that I should not get out of an equity fund. I got out anyway and have saved myself literally thousands.
Posted by: waiting_ | Feb 7, 2008 11:30:28 AM
This topic links in with your post under your alter ego musings and the
authors@google youtube link to Michael Shermer, Professional Skeptic, on the Mind of the Market.
http://bigpicture.typepad.com/writing/2008/02/michael-shermer.html
Good watch. Good read. Thanks. It's nice to know how the market works ;>
Posted by: Mark Hessel | Feb 7, 2008 11:37:46 AM
Techy, You stated: "so whats wrong in missing out 10% gain to avoid 30% risk?"
I would point to the study from Lipper to answer that question. I don't know your personal situation so I am talking in general terms.
Why approach investing in an all or nothing mode? 100% cash or 100% in the market is not asset allocation or diversification. If you are that nervous, you might want to consider scaling into suitable longterm investments through a dollar cost averaging program. Are you kidding about the India bank?
Posted by: kk | Feb 7, 2008 11:40:31 AM
gary:
when people used to tell me stock market historically always beats other assets class.
but what if thats about to change? or hasnt that already changed if someone started investing in year 2000? if we do some backtesting for last 8 years??
what about nikkei, 15 years??
my perception is that stock market does well only because of speculative mania...where people start bidding up with the hope that they will be paid more in future by some one else.....and within no time price multiples go all the way to 100 or more.
but what if that is about to change.....what if equities will be viewed as a very risky asset due to all the turmoil in the past 8 years??
what if people will not lend a money to a public company unless they get a better yield than a money market account?? and shareholders are respected for their opinion (unlike what MSFT is doing right now)
right now a shareholder makes money only if there is speculation....and he loses money if the market starts to tank, the companies are not using the profits to take care of the shareholders, they use it to take care of the management agendas....
shareholders did not care in the past because they used to get better price from the next person..
this may sound like a idealist talk.....but if usa goes into a long recession (1-2 years, almost depression.....unemployment as high as 8%, housing falls another 40%)
it will become true and all the historical data will get averaged down..
Posted by: techy2468 | Feb 7, 2008 11:47:20 AM
