Step 3: Stock Pickers updated

Gambling vs. Investing: A Fine Line for Traders

Step 3: Stock Pickers updated

By some estimates, more than 10 million Americans are struggling with impulses that can be considered as gambling addictions. Of course, such compulsive behaviors can take many forms, from regular visits to casinos and race tracks to frequent use of betting apps and online card games. 

A rising problem in the field, medical experts suggest, is a wave of investors who are taking advantage of technological advances to monitor and trade in their brokerage accounts.

"Before everyone had a computer on their desks, you had to go through so many hoops to trade that it wasn't very practical for most people," says Timothy Fong, co-director of the UCLA Gambling Studies Program. "These days, it's become so easy to buy and sell stocks that your computer can almost become a slot machine."

Like any other potentially addictive behavior, the psychiatry professor and longtime gambling researcher notes that "anything done to an extreme level" can lead to addictive behavior.

"I've been doing this work for about 20 years now, and one of the very first patients I saw was a wonderful gentleman who was an occasional trader, but then he started looking at his portfolio more and more," Fong recalls. "He wound up trading on a daily basis and eventually got into real financial trouble by losing $300,000 in a single trade." 

Just like with gamblers, he sees too many stock traders trying to convince themselves they don't have a problem by reasoning that once losses pile up, they'll get out. "Clearly, that's not a sound investment strategy, but it also leads to a slippery behavioral slope," Fong says. 

The trader he works with finally stopped trying to buy and sell stocks on a regular basis. But he didn't become a patient of Fong's until he'd moved on to collecting credit cards and driving up his personal debt into the hundreds of thousands of dollars, according to the psychiatrist. 

"Studies on this problem tell us that at any given time, millions of people are going to have an addiction," Fong says. "We also know that a growing part of this increase in gambling-related issues is tied to stock trading." 

Investors need to realize, he points out, that "if you're constantly hearing a steady feed of information from a Jim Cramer on cable television, it makes for a more difficult situation in terms of controlling your urges to trade." 

Just like betting on horses or cards, trading stocks courts a certain amount of risk. And similar to other activities often cited as breeding grounds for gamblers, monitoring a portfolio's stock positions isn't necessarily an unhealthy behavior, says Keith Whyte, executive director of the National Council on Problem Gambling. 

Still, he notes that addictive behavior tends to ferment in less-structured environments. "If  you're feeling a certain amount of psychological distress, you're probably not following a plan," says Whyte. That's important, he adds, since if you don't have a plan for how to deal with market stress, "investing can turn into a less-structured activity where your behavior is dictated by chance and the current state of your emotions."

Besides sticking to some sort of disciplined approach in handling investment decisions, Whyte finds that gambling therapists emphasize in their work with stock traders a need to control how frequently they're tinkering with their portfolios. 

"It goes back to your emotional state," he says. "By setting a reasonable limit on the time you spend on investing, you're in effect setting boundaries for how to approach working with a portfolio."

A fine line exists between gambling and trading, agrees Tony Marini, a senior gambling therapist at U.K.-based Castle Craig Hospital's addiction clinic. "A lot of traders don't even realize their emotions are getting the best of them," he says. "It can take years for an addiction to materialize, especially when it comes to how people deal with the stress of handling their portfolios." 

At Castle Craig, which works with gamblers across Europe and the U.S., psychiatrists and gambling therapists have developed a broad cycle of behavior they typically see in gambling addicts. Those are: 

  1. Winning 
  2. Losing 
  3. Desperation
  4. Recovery
  5. Desitution

Drug abuse and sports betting are common playgrounds for gamblers. To Marini, though, betting on stocks is an overlooked symptom that can lead to destructive patterns of behavior. Similar to his patients who actively trade in cryptocurrencies, he finds that obsessed stock traders are prone to falling prey to the same addictive impulses as other forms of gambling.

"The activity might be different," Marini says, "but the range of emotions and how they deal with financial stress usually lands obsessive stock traders into the same general cycle of addiction."  

A good friend of his became so addicted to trading stocks that it led the man to spending an increasing amount of time watching financial markets. "Tracking financial performance of individual companies became such a time-consuming interest that he clearly crossed the line -- trading became an escape from reality," Marini says. 

It also gave him "a sense of euphoria" that led to other gambling habits such as sports betting. "When faced with greater risk and enhanced trading activities, research shows that your body starts to produce more endorphins," Marini says. "That happened with my friend, whose desire to feel a bigger and bigger emotional high just kept building the more he traded." 

Of course, such a sense of pleasure can come regardless of whether someone makes money or not in a trade. "A losing trade can spur what's known as euphoric recall. That's where you remember the high of winning, and after losing, you want to recapture that feeling even more strongly than before," Marini says. 

On the other hand, a trade that seems successful in the short-term tends to intensify any sense of euphoria. "It's just natural for someone to remember the good times and put away memories of the bad times," Marin says. "That's true for everyone, not just gamblers and addicts."

Trading stocks in an excessive manner is fundamentally an "irrational" behavior, Marini adds. "As you trade more and more, the odds are increasingly against you," he says. "But a higher level of risk can be seductive and make your emotions work against your brain's ability to make more rational decisions."


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