Gambling and trading addiction in the stock market.

Abstract

This dissertation aims to raise an awareness on gambling and trading addiction in the stock market. As the observed trading behaviours can be harmful to investors’ portfolio, it can also influence other issues such as social and financial problems. The study contains three main parts to introduce trading as gambling and to validate the screening tool for trading addiction. First, a literature review on trading behaviours introduces gambling as another alternative explanation for the observed trading behaviours. The chapter reviews literatures starting from the classical model of rational investment and decision-making behaviours. Then it was found that investors do not follow these traditional investment models, but rather act in an irrational way. The observed trading behaviours can be explained by overconfidence, reinforcement learning, preference for skewness, sensation seeking or entertainment motive, and trading as gambling. Second, the diagnostic checklist for gambling disorder from the American Psychiatric Association is adopted to assess how widespread gambling and trading addiction are among investors. A self-reported survey shows that 9.5% of the investors gamble in the stock market. While 4.9% shows symptoms for addiction, which is an extreme gambling behaviour. In addition, the trading addition score is associated with speculative trading behaviours such as frequent trading, day trading and buying lottery stocks, beyond common factors such as overconfidence and high-risk tolerance. Third, a representative sample of Dutch retail investors confirms the result in line with the previous self-reported survey showing 3.6% of the investors that meet the criteria for problem gambling, and 4.4% displays symptoms for addiction. The study further shows that investors with signs of a trading addiction have a more active and speculative trading style, indicated by a higher frequency of stock trading, day trading, and investing in derivatives and leveraged products. In addition, trading addicts tend to have more financial problems and lower socio-economic status than other investors.