Trading as entertainment

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Trading as entertainment

• Daniel Dorn (Drexel University)
• Paul Sengmüller (UvA Business School)

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Research questions

• Can entertainment motives help explain variation
  in trading activity across people?
• What is the magnitude of entertainment-motivated
  trading?

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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

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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)

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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

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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)
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Normal vs excess turnover

• Normal turnover can be rationalized by savings,
  liquidity, or rebalancing motives(similar to
  Barber/Odean)
• Excess turnover is the remainder

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Normal vs excess turnover
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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.

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People who enjoy investingtrade more
excessively
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People who enjoy risky propositionstrade more
excessively
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Multi-variate setting

• Similar results when we control for
• Gender ()
• Age (-)
• Educational attainment
• Self-employment ()
• Income
• Wealth (-)

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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.

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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

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Unimportant accounts cannot explain the results
All accounts
Only important accounts
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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

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Portfolio returns before the survey before
trading commissions
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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.

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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

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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?