Risk, reward, and relentlessness: Why young Indians keep trading despite losses

First, a consultation paper published by the Securities and Exchange Board of India (Sebi) said in 2023-24, on average, 85 out of every 100 individuals trading in index derivatives, lost money. Once the cost of trading was taken into account, 90 out of 100 lost money.

Second, the paper pointed out that on average a retail trader held an open position only for around 30 minutes.

Third, a bulk of those buying and selling stocks and their derivatives are young. In March 2020, less than one in four registered investors were less than 30 years of age. By July 2024, nearly two in five investors were less than 30 years of age.

These three data points together imply that most of the newer investors in the stock market are youngsters who are trading at a very fast pace and losing money. Now, here’s a fourth data point to suggest that it doesn’t seem to be bothering them, given that they continue to trade in derivatives in their search to make quick and more money.

A recent research note published by ICICI Direct, a stock brokerage, points out that in March 2024, the monthly turnover of futures and options in India reached $1.1 trillion, from $27 billion in March 2019, a jump of close to 4,000%.

The appeal of trading

So, why do individuals continue to trade in stocks and their derivatives, driving turnover to such huge levels, despite facing losses?

First, the low starting salaries in many formal sector jobs may be forcing individuals 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. Further, the easy availability of loans that can be used to trade feeds into this phenomenon.

Second, in every era, there is a zeitgeist or the 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 one another think similarly.”

Now, we live in an era where fund managers, financial influencers and even politicians sometimes have been telling us that if you want to make money you should come to the stock market. The financial influencers have an added message over and above this: you can make money quickly by trading in stocks and their derivatives.

Such messaging, which promotes similar thinking, is now transported very easily over social media, through posts, forwards, long videos and short reels. And that has made many traders who have lost money and continue to lose money, possibly think that they must probably be the only ones losing money, and that their time will change, sooner rather than later. This possibly keeps them going. It essentially ensures that stories being put out by fund managers and financial influencers create a stronger impact on traders’ minds than Sebi’s data on the base rate of success for those trading.

Third, what psychologists call the escalation of commitment or more fancily refer to as the sunk-cost fallacy, may be at work. Here’s an example. Let’s say you go to watch a movie. Within the first half an hour you realise that it’s a terrible movie. What are the chances that you will leave the cinema hall and spend your time doing something else? Pretty low. Or if you buy a pair of shoes which turn out to be tight? Do you throw them? As Barry Schwartz writes in The Paradox of Choice: “Having bought the shoes, you keep them in the closet even though you know you’re never going to put them on again, because to give the shoes away or throw them away would force you to acknowledge a loss.”

This doesn’t just happen with terrible movies and shoes. As Yuval Noah Harari writes in Homo Deus—A Brief History of Tomorrow: “Business corporations often sink millions into failed enterprises, while private individuals cling to dysfunctional marriages and dead-end jobs.” This is the sunk-cost fallacy.

Daniel Kahneman, a psychologist who won the Nobel Prize in Economics, defines it in Thinking, Fast and Slow as: “The decision to invest additional resources in a losing-account.” Basically, throwing good money after bad, with the sunk cost fallacy leading to an escalation of commitment.

Also Read: How India turned into a trading nation

How does this apply to individuals who are losing money but continue to trade? The escalation of commitment seems to be at work. Both money and time have been lost to trading. But given that that time and that money have already been invested in a losing cause, more time and more money are being invested in it in the hope of making the whole thing viable. The escalation of commitment is at work.

To conclude, when stories become more important than data, it normally doesn’t end well. We are going through one of those phases all over again.

Vivek Kaul is the author of Bad Money.

Also Read: New lottery: The human cost of F&O trade