First, a consultation paper released by the Securities and Exchange Board of India (Sebi) indicated that on average in 2023-24, 85 out of 100 people trading index derivatives lost money. Once the cost of trading was taken into account, 90 out of 100 lost money.
Secondly, the document noted that on average, a retail trader held an open position for only about 30 minutes.
Third, the majority of those buying and selling stocks and their derivatives are young. In March 2020, less than one in four registered investors was under 30 years old. By July 2024, nearly two in five investors were under 30 years old.
These three data points together imply that the majority of new investors in the stock market are Young people who operate at a very fast pace and lose money.Now, here is a fourth piece of data that suggests that it doesn’t seem to bother them, as they continue to trade derivatives in their quest to make more money, faster.
A recent research note published by ICICI Direct, a brokerage, notes that by March 2024, monthly futures and options turnover in India has reached $1.1 trillion, up from $27 billion in March 2019, a jump of nearly 4,000%.
The appeal of trading
So why do people continue to trade stocks and their derivatives, driving turnover to such huge levels, despite facing losses?
First, low starting wages in many formal sector jobs may be forcing people to generate a second income through trading. This has become easier due to the availability of affordable smartphones, very cheap internet, and easy-to-use apps with very good user interfaces. Furthermore, the easy availability of loans that can be used for trading fuels this phenomenon.
Secondly, in every era there is a zeitgeist, or spirit of the times. Or as Robert Shiller writes in Irrational Exuberance: “A fundamental observation about human society is that people who communicate regularly with each other think alike.”
We live in an age where fund managers, financial influencers and even politicians have occasionally told us that if we want to make money, we should go to the stock market. Financial influencers have an added message: you can make money quickly by trading stocks and their derivatives.
These kinds of messages, promoting a similar thought, are now very easily spread through social media, via posts, reposts, long videos and short reels. And that has made many traders who have lost money and are still losing money, possibly think that they are probably the only ones who are losing money and that their time will change, sooner rather than later. This possibly keeps them going. It basically ensures that the stories that fund managers and financial influencers put out there create a stronger impact on traders’ minds than Sebi’s data on the base success rate for traders.
Third, there may be what psychologists call escalation of commitment, or, more elegantly, the sunk cost fallacy, at play. Here’s an example: Suppose we go to see a movie. Within the first half hour we realize that it’s a terrible movie. How likely are we to leave the theater and spend our time doing something else? Pretty low. What if we buy a pair of shoes that are too tight? Do we throw them away? As Barry Schwartz writes in The Paradox of Choice, “After we buy the shoes, we put them away in the closet even though we know we’ll never wear them again, because giving them away or throwing them away would force us to acknowledge a loss.”
This doesn’t just happen with movies and bad shoes. As Yuval Noah Harari writes in Homo Deus: A Brief History of Tomorrow“Corporations often invest millions in failed businesses, while private individuals cling to dysfunctional marriages and dead-end jobs.” This is the sunk cost fallacy.
Daniel Kahneman, a Nobel Prize-winning psychologist in Economics, defines it in Thinking fast and thinking slow as: “The decision to invest additional resources into a losing account.” Basically, throwing good money after bad money, with the sunk cost fallacy leading to escalation of commitment.
Read also: How India became a trading nation
How does this apply to people who are losing money but are still trading? It seems that increased commitment is at stake. Both money and time have been lost in trading, but since that time and money have already been invested in a lost cause, more time and more money are being invested in it in the hope that it will all be viable. Increased commitment is at stake.
To conclude, when stories become more important than data, it usually doesn’t all end well. We are going through one of those phases over and over again.
Vivek Kaul is the author of Bad Money.
Read also: New lottery: the human cost of food and drink trade
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