Friday, September 19, 2014

Maybe Overtrading Isn't a Discipline Problem

Research from Barber and Odean finds that men trade 45% more frequently compared to women and pay for their overtrading by achieving lower risk-adjusted returns.  A common interpretation of this finding is that men are more risk-taking than women and more aggressive in their trading, perhaps due to the impact of testosterone

Consider a different interpretation, however.  Research from Anderson and Stranahan found that overtrading is most common among elderly traders, minority traders, and traders with less wealth.  What's the common thread here?  Perhaps traders overtrade because they feel a greater need to make a living from their trading.  Elderly, minority, and poorer traders may not possess other sources of income and might pressure themselves to support themselves and families through trading.  Men are traditionally viewed as breadwinners for families and may also feel a heightened need to make trading succeed financially.  

It is ironic that those who feel the most pressure to make trading succeed are the most vulnerable to poor trading practices.  It is much easier to sit out quiet or noisy markets when you don't have to rely on trading as a primary source of income.  It is also easier to practice prudent risk management when you don't need to double your money or more from a small account.

We know from research that the great majority of traders are not able to sustain a living from trading.  Perhaps their overtrading is not so much the result of a lack of discipline as a sign of desperation.  Who addresses the needs of traders who can't trade for a living and need to find constructive alternatives?  It's not an area that brokerage firms, education vendors, or coaches have much interest in highlighting.  In my next post, I'll take a look at life after trading and what makes it successful.

Further Reading:  The Costs of Overtrading