Grinblatt and Keloharju (2008) and Dorn and Sengmuller (2009) show that active stock market trading can be driven by sensation seeking in the financial domain. We continue the paper by explaining our measures of gambling motives in the next section. In general, the investors in the AFM panel are somewhat wealthier, have a higher income and are more likely to be a business owner.
Only 10% (DHS) to 15% (AFM) of investors are wealth seekers, willing to take risks for a small chance to get rich. DHS) by investors have played conventionally in the past 12 months. Finally, about 5% of investors in both samples can be classified as excessive gamblers in the financial markets because they exhibit four or more DSM-5 symptoms of compulsive gambling. Similarly, the typical investor shows almost no symptoms of compulsive stock market gambling.
Only 9% of the investors in the AFM panel trade stocks 3-4 times a week, or almost every day, compared to only 2% of the DHS investors. In the DHS sample, trading in derivatives and leveraged products is rare (11% and 4%, respectively), but it is more common in the AFM sample (28% and 12%). Investors in the AFM panel tend to trade more actively than in the DHS, and the AFM investors are also more likely to own derivatives and leveraged products.
This group of investors is approx. twice as likely to trade excessively in the stock market and to day trade. The results show that investment in derivatives is best explained by the motive of excessive gambling in the stock market (DSM-5). In particular, the compulsive gambling motive conveyed by the DSM-5 excessive gamblers on the stock market screen and the trading as a substitute for conventional gambling motive conveyed by the DOSPERT Risk-taking gamblers screen explain excessive stock trading behavior well.
Gambling Motives and Financial Situation
Section 21 we analyze how our screens for gambling motives relate to the financial situation of the household. 22 used debt or savings, and one for at least one financial problem (excluding late bill payment). Excessive stock market gamblers tend to have significantly poorer scores on all indicators of financial situation, compared to the baseline investor group without any gambling motives.
These excessive gamblers are three times more likely to go into debt or save, and more than twice as likely to have experienced at least one financial problem in the past 12 months. Past gamblers and risk gamblers are about twice as likely to take on debt or use their savings. Finally, investors with more benign motives for gambling, such as sensation seekers and wealth seekers, are not significantly worse off financially than the baseline group.
The multiple regression results in Table 6 confirm that excessive gamblers in the stock market tend to be in significantly worse financial shape and have more financial problems compared to other investors with a similar socio-demographic profile. Risky gamblers also have more difficulty making ends meet, while past gamblers report poorer financial health and experience more financial problems. Consistent with previous results, we find that milder forms of gambling motives, investing for fun/challenge, and investing because of a small chance of getting rich, are not associated with poorer financial status.
While it is difficult to determine the direction of causality, one way to read the results is that investors who gamble excessively in the stock market, or who trade as a substitute for conventional gambling, tend to be in relatively worse financial situation due to the costs and losses of their speculative trading strategies. However, it is also possible that a relatively poor financial situation is a trigger for people to gamble on the financial markets in an attempt to catch up and quickly acquire a large amount of wealth. Regardless of the direction of causality, both scenarios are concerning and may prompt pre-screening for symptoms of excessive gambling by investors, for example using the DSM-5 screen.
Conclusions
24 We find that gambling motives can explain a substantial portion of individual investors' excessive and speculative trading behavior, beyond what well-known factors such as overconfidence, risk tolerance, trading experience, and financial literacy can explain. Of the various gambling motives, trading as a substitute for gambling and compulsive trading as gambling best explain which investors have a high trading frequency, tend to day trade and invest in derivatives and leveraged products. In a horse race between the various gambling proxies, the compulsive gambling screen in the stock market best explains the excessive and speculative trading.
Furthermore, individual investors who pass the compulsive gambling screen also tend to be in a significantly worse financial situation compared to investors who have a similar socio-demographic profile in terms of wealth, income and education. . In contrast, more harmless gambling motives, such as investing for fun or a small chance to get rich, are not associated with active trading behavior and a worse financial situation. On the plus side, our data shows that only a small proportion of the Dutch population directly trades in individual stocks, derivatives or leveraged products, around 5%.
Additionally, most of these direct investors trade stocks less than 10 times a year and do not invest in derivatives or leveraged products. Only a small group of investors follow more active and speculative trading strategies, the most common being day-trading stocks and investing in derivatives, followed by about one in five direct investors (or 1% of the Dutch population). Our screen for compulsive stock market gambling can be helpful in identifying those active investors who may be more at risk than others of damaging their finances with their trading behavior.
Compulsive gambling is a known risk that can have serious consequences for people's personal lives, including their wealth, health and family relationships, but compulsive trading such as gambling in the financial markets has received limited attention to date. We hope that our research will stimulate further research into the causes and consequences of gambling addiction in the stock market. 25 with trading experience, and to what extent trading as gambling is influenced by the past profits and losses incurred by investors.
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