The False Promise of Trading
The purpose of this article is threefold: first, to present empirical evidence that trading is an ineffective and disadvantageous investment approach, second, to explore the reasons behind the persistence of this behaviour despite overwhelming evidence to the contrary, and third, to investigate the ways in which trading platforms exploit this paradigm.
Data and Studies:
1: A study published in 2020 by the Brazilian Securities Commission analysed the trading behaviour of 20,000 day traders over a two-year period and found that 97% of them lost money. The average daily profit of the successful traders was just $18, while the average daily loss of the unsuccessful traders was $63. This study suggests that the vast majority of retail day traders are unable to consistently generate profits and often incur significant losses.
2: A study published by the University of California, Berkeley, analysed the trading activity of over 66,000 retail accounts from 1991 to 1996 and found that the average day trader underperformed the market by 3.5% per year. This study suggests that day trading is an inherently difficult and risky activity that tends to produce subpar returns for the average retail trader.
3: Similarly, a study by JP Morgan Chase in 2019 found that retail investors who engage in frequent trading tend to underperform the market by a significant margin. The study analysed the trading activity of over 3 million retail accounts from 2013 to 2018 and found that the average investor who traded more than 10 times per month underperformed the market by 4.5% per year. This suggests that frequent trading is a losing strategy for most retail investors.
4: A study by the North American Securities Administrators Association (NASAA) found that 82% of day traders lose money and only 18% earn profits. The study analysed the trading activity of over 1,000 day traders and found that the average trader incurred a net loss of $15,000 over a six-month period.
5: A study by the University of Oxford analysed the trading activity of over 700,000 retail traders in Taiwan from 1992 to 2006 and found that only 9.81% of them earned positive net returns after accounting for transaction costs. The study suggests that the majority of retail traders are unable to generate profits that are sufficient to cover their trading costs.
6: A study by the Federal Reserve Board analysed the trading activity of over 100,000 retail accounts from 1991 to 1996 and found that the average day trader underperformed the market by 1.3% per day.
7: A study by Brad Barber and Terrance Odean analysed the trading activity of over 66,000 retail accounts from 1991 to 1996 and found that the average day trader underperformed the market by 0.94% per day. The study suggests that day trading is a losing strategy for the majority of retail traders.
8: A study by the Autorité des Marchés Financiers (AMF) in France analysed the trading activity of over 5,000 retail traders from 2009 to 2012 and found that 89% of them lost money. The study suggests that retail traders are often lured by the promise of quick profits and fail to appreciate the risks involved in day trading and swing trading.
The Role of Ego in Investing:
The concept of ego is central to many theories in psychology, including psychoanalytic theory, which suggests that the ego is the part of the psyche that mediates between the conflicting demands of the id (our unconscious desires) and the superego (our conscience or sense of morality). In the context of investing, the ego can play a significant role in driving investor behaviour, often leading to irrational decisions and behaviours.
One way that ego can influence investor behaviour is through overconfidence. Overconfidence can lead investors to believe that they have more information or expertise than they actually do, leading to overtrading, chasing returns, or holding onto losing investments for too long. This behaviour can be driven by the desire to prove one's intelligence or competence to oneself or others.
The desire to prove one's intelligence or competence can be a major factor in the behaviour of retail investors, particularly those who have a strong emotional attachment to their investments. For example, retail investors may have a psychological need to demonstrate their intelligence or investment savvy to friends, family members, or online communities, and may engage in behaviours like making frequent trades or taking on excessive risks in order to prove themselves. Retail investors may feel pressure to keep up with their peers, particularly in the age of social media, where investment success is often publicised, fabricated, exaggerated, and celebrated.
However, as with professional investors, the desire to prove oneself can lead excessive risk-taking, particularly if retail investors lack the expertise or resources to make informed investment decisions. Retail investors may engage in behaviours like day trading, chasing trends, or investing in speculative assets without fully understanding the risks involved. This behaviour can lead to significant losses, and can also undermine the investor's sense of self-worth and confidence.
In addition, the desire to prove oneself can also lead retail investors to become emotionally attached to their investments, and to resist selling even in the face of new information or knowledge. This behaviour can be driven by a reluctance to admit mistakes or accept losses, or by a belief that the investor's intelligence or competence is tied to the success of their investments. In this instance, the ego driven behaviour is an example of confirmation bias, seeking out information that confirms their pre-existing beliefs about an investment and ignoring information that contradicts those beliefs. This behaviour can be driven by the desire to be right or to avoid cognitive dissonance, the uncomfortable feeling that arises when our beliefs and actions are not aligned. Individuals tend to make cerebral changes to assuage the psychological stress, either by adding new parts to the cognition causing the cognitive dissonance, this known aa rationalisation, or by avoiding circumstances and contradictory information likely to increase the magnitude of the cognitive dissonance, this is confirmation bias.
Overall, the desire to prove oneself can be a significant factor in the behaviour of retail investors, and can lead to negative outcomes. It is important for investors to be aware of their own motivations and biases, and to seek out objective information and advice to make informed investment decisions.
The ego can also influence investor behaviour through the fear of missing out (FOMO). FOMO can lead investors to make impulsive decisions to buy into an investment because they fear missing out on potential gains, rather than making a rational assessment of the investment's potential risks and rewards.
The ego can play a significant role in FOMO because it can lead people to make decisions based on their self-image and social status rather than rational thinking. Ego is the part of our identity that is shaped by our beliefs, experiences, and interactions with the world around us. It can be fragile and easily influenced by external factors, such as the opinions of others.
When it comes to FOMO, people may feel pressured to participate in an activity or investment opportunity because they believe it will enhance their social status or make them feel more important. They may also fear being left out of a group or community that they identify with or aspire to join.
The ego can also create a sense of overconfidence and lead people to take risks that are not based on sound reasoning or data. For example, someone with a strong ego may believe that they are smarter or more capable than others and, therefore, more likely to succeed in a particular investment opportunity. This can lead them to ignore warning signs or red flags and make decisions based on their ego-driven beliefs rather than objective analysis.
In conclusion, the ego can play a role in FOMO by driving people to make decisions based on their self-image and social status rather than rational thinking. It is essential to be aware of our ego and how it can influence our decision-making processes, especially when it comes to investment decisions. We should strive to make decisions based on objective analysis and sound reasoning, rather than ego driven beliefs or emotions.
In summary, the ego can play a significant role in driving investor behaviour, often leading to irrational decisions and behaviours. Understanding how ego influences investor behaviour can help investors make more informed and rational decisions about their investments.
Ego Marketing:
Many trading apps and platforms exploit investor ego and exacerbate this problem through their marketing. One such type of marketing that appeals to someone's ego is called, "Ego marketing" or "Ego appeal marketing." This type of marketing strategy targets a person's desire to feel special, important, and unique, by presenting products or services in a way that suggests that using them will make the consumer feel more, intelligent, prestigious, successful, or attractive. Examples of ego marketing can be seen in luxury brands that emphasise exclusivity and sophistication, or in ads that feature celebrities and influencers endorsing products.
Some recent ego appeal marketing taglines from trading platforms include “Trade Like a Pro”, “Smarter Trading Begins with Knowledge”, “A Serious Bank for a Serious Trader”, “Winning is in our DNA” , “Good Job, Genius”. “Where Smart Investors Get Smarter”. “Made by Traders, for Traders”.
Ego marketing can be considered a form of emotional branding. Emotional branding is a marketing approach that seeks to create an emotional connection between a brand and its customers by appealing to their emotions, values, and aspirations. Ego marketing is a specific type of emotional branding that appeals to a person's ego, which is a strong emotional driver. When a brand successfully appeals to a person's ego, it can create a powerful emotional connection with that person, leading to increased loyalty and brand advocacy. However, it can also be highly manipulative, leading to negative consequences for the consumer.
Call to Action Marketing:
"Call to action" (CTA) marketing is a technique used by trading platforms to encourage users to take a specific action, such as signing up for an account or making a trade. The goal of CTA marketing is to increase user engagement and ultimately drive revenue for the platform. Recent popular examples include “Dare to Trade”, “Trade with Confidence”, “Trade the World”, ”Fortune Favours the Brave”.
There are several types of CTAs that trading platforms may use in their marketing efforts, including:
1.Sign-up CTAs: These CTAs encourage users to create an account with the trading platform. They may offer incentives such as free trades or cash bonuses for signing up.
2.Trade CTAs: These CTAs encourage users to make a trade on the platform. They may offer special promotions or discounts on certain trades to incentivise users to take action.
3.Referral CTAs: These CTAs encourage users to refer friends and family to the trading platform. They may offer rewards or bonuses for each new user referred.
4.Education CTAs: These CTAs encourage users to learn more about trading and investing. They may offer free educational resources or webinars to help users improve their trading skills.
"Call to action" (CTA) marketing can be manipulative and lead to excessive trading for a few reasons.
Firstly, CTAs are designed to create a sense of urgency or scarcity, which can make users feel like they need to act quickly to take advantage of an opportunity. This can lead to impulsive decision-making, which may not always be in the user's best interest. Trading platforms may use phrases like "limited time offer" or "act now" to create a sense of urgency and encourage users to take immediate action.
Secondly, CTAs may offer incentives or rewards for taking certain actions, such as signing up for an account or making a trade. While these incentives can be attractive, they may encourage users to make decisions that are not in their long-term financial interest. For example, a user may be tempted to make a risky trade to take advantage of a promotion, rather than making a more prudent investment decision.
Finally, excessive trading can also be a side-effect of CTAs. When users are repeatedly exposed to CTAs encouraging them to trade or take action, they may feel pressure to constantly monitor their investments and make frequent trades. This can lead to a pattern of excessive trading, which can be costly and detrimental to long-term financial goals.
CTAs can be an effective marketing technique for trading platforms, they can also be manipulative and lead to excessive trading if not used responsibly. It is important for users to carefully consider the risks and benefits of any trading decision and to avoid making impulsive decisions based solely on promotional incentives or pressure.
Fear Of Missing Out Marketing:
The phrase "history is filled with almosts”, used in a crypto platform advertisement, is an example of a common marketing tactic known as fear of missing out (FOMO) marketing. As previously discussed, FOMO is a powerful motivator that exploits the human desire to not be left out, or miss an opportunity.
The phrase suggests that the products being advertised are the next big thing and that failure to invest in them would result in missing out on a potentially life-changing opportunity. By emphasising the potential for missed opportunities, the advertisement aims to create a sense of urgency and persuade people to take action immediately.
However, the phrase "history is filled with almosts" is also a form of manipulative behaviour as it plays on people's emotions rather than relying on rational thinking. It creates a sense of insecurity and fear of losing out on something valuable, even if the potential gain is uncertain or risky.
Moreover, the phrase implies that the past is littered with opportunities that almost made people rich but were missed. This may not necessarily be true, as many opportunities are lost because they were not profitable or because they were not pursued correctly.
In conclusion, while the phrase "history is filled with almosts" may sound catchy, it is a manipulative marketing tactic that plays on people's emotions and fear of missing out. It is essential to research and analyse investment opportunities carefully before making any decisions, rather than making decisions based on emotional reactions to marketing messages.