Sunday saw the mid point of our current Mentor Program – at this gathering I get up and drone on about my philosophy of the trading world. One of the points I try to get across is the notion that activity does not equal profitability and that intriguingly the main motivation for trading for a vast majority of traders is entertainment. Surprisingly, it is not profitability.
Interestingly, this is not only my observation and a series of chats since then has prompted to post this particular study – An Analysis of the Profiles and Motivations of Habitual Commodity Speculators by W.B. Canoles, S.R. Thompson, S.H. Irwin, and V.G. France, OFOR Paper Number 97-01 May 1997
This study is interesting because it directly addresses the notion of trading as entertainment. I have cut out the pieces of the discussion that I thought we salient and have added my own emphasis.
“The typical trader assumes a good deal of risk in most phases of his life. He is both an aggressive investor and an active gambler.
[He] does not consider preservation of capital to be a very high trading priority.
As a result, he rarely uses stop loss orders. He wins more frequently than he loses (over 51% of the time) but is an overall net loser in dollar terms. In spite of recurring trading losses, he has never made any substantial change in his basic trading style.
To this trader, whether he won or lost on a particular trade is more important than the size of the win or loss. Thus he consistently cuts his profits short while letting his losses run.
He also worries more about missing a move in the market by being on the sidelines than about losing by being on the wrong side of a market move; i.e., being in the action is more important than the financial consequences.
Participating brokers confirmed that for the majority of the speculators studied, the primary motivation for continuous trading is the recreational utility derived largely from having a market position.
Numerous indications in our survey indicate that they are not trading solely or even primarily for profit, but may be maximizing excitement or the number of winning trades.”
What is interesting abut this paper is that it unintentionally neatly catalogues the failings of most traders. What the papers authors were looking at were motivations not the technical failings that these motivations generate. However, they very elegantly point out what is wrong with most traders. Whilst, behavioural finance has gone on the explain many of these failings in greater depth this paper serves in my mind as a landmark.