Trading as entertainment Daniel Dorn (Drexel University) Paul Sengmüller (UvA Business School)
Research questions • Can entertainment motives help explain variation in trading activity across people? • What is the magnitude of entertainment-motivated trading?
Why do people tradeindividual stocks? • Savings and dissavings But: Why trade individual stocks? Why trade aggressively to begin with? • Risk sharing But: investments in the familiar • Speculation But: No-trade theorems Individuals are not very good at it
Trading as entertainment • Previous explanations for why people trade rest on perceived pecuniary benefits of trading • Black (1986, JF) and Shiller (2000) Trading as gambling Trading as a by-product of a hobby (following the financial markets)
Trading and trader data • Complete transaction history for a random sample of ~21,000 clients at a German discount broker, 1/1995-5/2000 individual stocks, bonds, mutual funds, options • Survey responses for a sub-sample of ~1,300 clients, 7/2000 objective attributes subjective attributes
Entertainment questions I enjoy investing. (”Es macht mir Spaß, mich mit Geldanlagen zu befassen.”) I enjoy risky propositions. (“Ich habe Spaß an riskanten Unternehmungen.") Games are only fun when money is involved. (“Spiele machen erst dann richtig Spaß, wenn es um Geld geht.”) In gambling, the fascination increases with the size of the bet. (“Bei Glücksspielen steigt die Faszination mit dem Wetteinsatz.") (Respondents indicate their agreement with each statement on a five-point Likert scale)
Normal vs excess turnover • “Normal” turnover can be rationalized by savings, liquidity, or rebalancing motives(similar to Barber/Odean) • Excess turnover is the remainder
Hypotheses • Investors who enjoy investing will trade more. • Investors who enjoy gambling will trade more. • Differences in trading activity between entertainment-driven traders and others shows up as excess, not normal, turnover.
People who enjoy risky propositionstrade more “excessively”
Multi-variate setting Similar results when we control for • Gender (+) • Age (-) • Educational attainment • Self-employment (+) • Income • Wealth (-)
Alternative explanations • Unimportant accounts drive results. • There is an omitted variable linked to survey participation. • Portfolio returns lead trading activity. People enjoy investing or gambling more after periods of high returns. • Overconfident investors trade more. Overconfident investors enjoy investing more.
Unimportant accounts? • Perhaps people who enjoy investing/gambling have more accounts elsewhere, e.g., full-service accounts • Overall, their trading activity may be similar to those of their peers, but they trade more in discount accounts
Unimportant accounts cannot explain the results All accounts Only important accounts
Non-response bias • Entertainment attributes are spuriously correlated with an unobserved variable that drives both survey participation and trading activity • Second stage of Heckman two-stage selection model returns similar results
Overconfidence Infer overconfidence from agreement with: • “I'm much better informed than the average investor.” • “My past investment successes were, above all, due to my specific skills.” • “I control and am fully responsible for the results of my investment decisions.”
Overconfidence • Only agreement with 1. “better than average” is positively correlated with trading activity (see also Glaser and Weber) • Inclusion of overconfidence attributes does not affect coefficients of entertainment attributes in multivariate regression
Conclusion • Entertainment motives appear to be important drivers of variation in trading activity across people • Trading may be hazardous to your wealth, but welfare implications are not that obvious • Does the availability of entertainment alternatives affect noise trader activity?