The stock market as a casino: Associations between stock market trading frequency and problem gambling.

Abstract

Background and aimsPersonal investors decrease their stock market investment returns by trading frequently, which the behavioral finance literature has primarily explained via investors' overconfidence and low levels of financial literacy. This study investigates whether problem gambling can help account for frequent trading in a sample of active gambler/investors, as suggestive of frequent trading being in part driven by a behavioral addiction to gambling-like activities.MethodsA retrospective cross-sectional study of 795 US-based participants, who reported both being active gamblers and holding stock market investments. Recollected stock trading activity (typical portfolio size, purchases and sales of stocks) was compared with scores on the Problem Gambling Severity Index, a financial literacy scale, and a measure of overconfidence.ResultsSelf-reported relative stock portfolio turnover was positively associated with problem gambling scores. This association was robust to controls for financial literacy, overconfidence, and demographics, and occurred equally among investors of all self-reported portfolio sizes.Discussion and conclusionsThis study provides support for the hypothesis that behavioral addiction to gambling-like activities is associated with frequent stock market trading. New investment products that increase the ease of trading may therefore be detrimental to some investors.