July 29, 2020
This Won't End Well

As stock prices plunged in March, E*Trade Financial Corp. opened 260,500 new accounts. That’s a record. It has never before opened that many accounts in an entire year.

“I feel like Sonic the Hedgehog, collecting my coins,” a 38-year-old real-estate agent with no investing experience told The Wall Street Journal for an article on the explosion of day trading since the beginning of the coronavirus crisis.

Before the pandemic, the article continued, her investing experience consisted of making contributions to her retirement account. Now, she says she trades thousands of dollars in stocks every day.

“Scared money makes no money,” she proclaims.

This won’t end well.

Why do smart people do dumb things with money?

In 2006, a pair of economists at the National Bureau of Economic Research examined 50 years of data from the Survey of Consumer Finances — a study of what Americans do with their money.

“In theory people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time,” Morgan Housel writes about the study in his forthcoming book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness.

“But that’s not what people do,” he continues.

The most important factor that dictates a person’s risk appetite is the set of experiences the person lived through — especially in their younger, formative years.

“Our findings suggest that individual investors’ willingness to bear risk depends on personal history,” the study’s authors conclude.

People who grew up in the Great Depression were forever skeptical of stocks. People who lived through the bull market of the 1980s and ‘90s were stock market evangelists.

“Not intelligence, or education, or sophistication,” Housel writes. “Just the dumb luck of when and where you were born.”

What about the 38-year-old real estate agent who’s now trading thousands of dollars a day in the stock market?

She was in her mid-20s when the financial crisis struck. By the time she would have accumulated enough capital to make investing worth her while, she had lived through the longest economic expansion in American history.

No book in finance will be greeted this year with more anticipation than Housel’s. It’s a clinic on why we do dumb things with money.

John J Maxfield / editor in chief of Bank Director
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