Posts Tagged ‘prediction markets’
“Wall Street sells stocks and bonds, but what it really peddles is hope”*…
Over the last several decades retail investors had been eclipsed in the stock market by institutions (e.g., pension funds). But COVID and the economic environment that surrounded started a trend that is reversing that polarity. Retail investors now account for roughly 30% of daily US equity volume, according to Goldman Sachs. Their stock trading in May of this year ran 10% above the previous record, set during the January 2021 meme-stock frenzy, and June set another all time high.
Much of that growth has come from the individuals known as day traders.” And while for the last 18 months or so, institutional investors have been cautious, often underweight, under-levered and short of conviction, these active amateurs in the retail crowd did the opposite, buying the dips, riding momentum strategies, and adding leverage. Retail investors tend to follow the herd, as can be seen in the surge in popularity – and valuations – of meme stocks and artificial intelligence stocks in recent years.
While historical performance is no guarantee of future results, history is not encouraging. The most “generous” reputable study your correspondent could find suggested that roughly 20% of day traders were at least marginally profitable; the balance lost money. Other studies suggest that 95-97% of all day traders lose money.
But as Simone Foxman reports, money is not all that they lose…
Surging retail trading isn’t just transforming markets; it’s also highly correlated with demoralization in young men, according to a new study.
One-quarter of men aged 18-29 said they trade stocks daily, and almost two-thirds of them (64%) report feeling like failures, according to a study of 2,000 men published Wednesday by the Institute for Family Studies, a pro-marriage think tank. The findings were strikingly similar to outcomes among men who gamble: Of the 23% of young men who said they gambled daily, including on sports and events, 66% reported similar angst, according to survey, which asked the young men a variety of questions about their personal behaviors and outlooks. Daily fantasy sports and pornography use were similarly correlated to feelings of failure, the survey found.
The struggles of young men are generating growing alarm among academics, pundits and billionaires. They warn that men are lagging in education and employment, gambling with their financial health on sports or event betting platforms and facing mental health crises.
At the same time, the line between gambling and investing has been blurred. Stock volumes from retail investors have doubled over the past 15 years, and day traders have driven record options volume. Now platforms like Robinhood Markets Inc. and Interactive Brokers Group are trying to capitalize on interest from Gen Z by also offering event-betting alongside stock-trading.
Some research suggests young people have embraced risky financial behaviors to try to generate returns in a world where homeownership and other markers of financial success are out of reach. Eighty percent of Gen Z investors said they’d invested or considered investing in stocks, options, crypto or prediction markets because they feel financially behind and see these investments as better tools to meet their financial goals, according to a Northwestern Mutual study.
The IFS researchers hypothesized that day trading, gambling, playing fantasy sports and porn use — among other activities — may be both coping mechanisms for dejection, stress and loneliness and also exacerbate them. Young men who engaged in these activities less than daily were about half as likely to report feelings of demoralization.
Overall, 42% of survey respondents said the statement “all in all, I am inclined to think that I am a failure,” described them very or somewhat well. This feeling was particularly strong among men without college degrees and those who were neither employed nor in school.
A quarter of participants said they felt lonely all of the time, while 30% expressed feeling that way some of the time.
The study also found disillusionment with the American dream, even as young men fostered high hopes for the future. Seven in ten respondents said that success is more a matter of who you know than ability or hard work, but 84% still said they had ambitious plans for their futures.
Further to the passing reference to “event-betting” above, we should note that prediction markets, while smaller than retail investing (at least for now), are growing explosively. Like day-trading, prediction markets are pitched in the language of empowerment and democratization. The former involves stocks and bonds, while the latter sells “event contracts“; but they share the same user base, the same psychological architecture, and the same uncomfortable gap between how they are marketed and what they actually deliver… so seem likely to contribute to the issues unpacked above.
Risky business: “Some 64% of Young Men Day Trading Stocks Feel Like Failures” (or here) from @simonefoxman.bsky.social in @bloomberg.com.
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As we parse symptoms and diseases, we might recall that it was on this date in 1966 that the U.S. Treasury Department, citing a lack of demand, ceased production of the $2 bill, which had been around in various forms since 1862. The (redesigned) denomination, featuring a portrait of Thomas Jefferson, was reintroduced in 1976… though readers will be forgiven if they mistakenly thought that “the deuce” was still retired: so few are in circulation that they are rarely encountered.
“Gambling is a tax on ignorance”*…
And as Einstein observed, “two things are infinite: the universe and human stupidity; and I’m not sure about the universe.”
Gambling– and related specualtive investments– have always been, for the vast majority of punters, a sucker’s bet. But, as Paul Kedrosky explains, the growing prevalence of AI and the emergence of prediction markets have amplified that painful reality…
The return skew in prediction markets’ returns is startling. It is partly a function of their nature, but also of vibe-coding script kiddies attacking every market anomaly as quickly as it arises. Check a recent WSJ article for examples.
The same dynamic is now spreading across retail-dominated markets. A driver is how AI lowers the cost of systematic exploitation and exploration to near zero. What used to require infrastructure, data pipelines, and bearded quants is now accessible via off-the-shelf models, APIs, and loosely stitched “agent” workflows doing … stuff that even their users don’t fully understand.
The result isn’t democratization of returns. It is wider participation, of a sort, alongside the rapid re-concentration of profits. A small subset of users—those willing to iterate fastest, monitor continuously, and deploy capital programmatically—capture gains, with everyone else just liquidity.
They scrape sentiment, parse new information, and reprice positions in seconds, compressing the half-life of mispricings. That doesn’t eliminate inefficiency, but changes who harvests it. The edge shifts from insight to speed, coverage, and execution discipline—areas where even modest automation compounds quickly, and edges disappear overnight.
Prediction markets are simply the cleanest expression of this trend because they combine thin liquidity, discrete outcomes, and high retail participation. But the same pattern is visible in options flow, single-stock volatility events, and even online poker, which AI increasingly dominates.
As AI tools continue to scale, expect this to get worse: a small cohort running semi-automated strategies extracting semi-consistent edge, and a much larger base supplying them returns. Under the pressure of AI prevalance, markets don’t flatten, the return gradient steepens to a cliff…
Fewer and fewer winners take more and more of the pot. The mechanics of concentration: “AI is Eating Markets” from @paulkedrosky.com.
* Warren Buffett
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As we contemplate concentration, we might note that today is Mother’s Day. As noted yesterday, the observance became official on that date in 1914. But the quest to honor moms began a good bit earlier. On this date in 1908, Anna Jarvis held a memorial for her mother at St. Andrew’s Methodist Church in Grafton, West Virginia, the location of the International Mother’s Day Shrine. But her quest to create Mother’s Day had begun three years earlier when her mother Ann, a lifelong activist, died.
Ann had tried to start a “Mother’s Remembrance Day” in the mid-19th century. On her passing, Anna enlisted the support of retailer extraordinaire John Wanamaker, who knew a merchandising opportunity when he saw one, and who hosted the first Mother’s Day ceremonies in his Philadelphia emporium’s auditorium. In 1912, Anna trademarked the phrases “second Sunday in May” and “Mother’s Day”, and created the Mother’s Day International Association. By 1914, she and Wanamaker had built sufficient support in Congress to score the Congressional Resolution noted yesterday. (President Wilson, who was by current accounts uninterested in the move– distracted as he was by the beginnings of his ultimately unsuccessful effort to keep the U.S. out of the troubles in Europe that became World War I– nonetheless knew better than to take a stand against moms.)
“The gambling known as business looks with austere disfavor upon the business known as gambling”*…
The quote above, from Ambrose Bierce, was true enough until relatively recently. Business has embraced gaming. When the Supreme Court struck down the federal ban on sports betting in 2018, Americans, who had legally wagered less than $5 billion on sports annually. Last year, they bet $150 billion, most of it online (with the active involvement of leagues and the broadcasters who serve up their games). And now prediction markets are on the scene, widening the apperture for online casino-like wagering to include politics, the Golden Globe awards, the return of Jesus Christ and virtually anything else… which could be a problem.
Indeed, just this past week, Common Sense Media released a report on gambling by young boys that reveals (among other deeply concerning things) that 1 in 3 American boys ages 11-17 are gambling before they can vote. (Full report here.)
Gambling addiction has been an issue in the U.S. for decades. But with the onslaught of new ways to wager, the problem is surging. And as Benjamin Errett (observes in an amusing piece on “McGuffins“– objects, devices, or events necessary to plot and the motivation of characters, but insignificant, unimportant, or irrelevant in itself), it’s a particularly problematic problem…
There’s a compelling argument to be made that money is the true MacGuffin. George Ainslie [here], a psychiatrist and behavioural economist, makes that case in a very readable paper on addiction and regrettable choices. He gets right to the weird thing about gambling as a compulsive behaviour: Spending money for a chance of getting more money (with the likelihood of losing it) is illogically direct. (I too got stuck on this paradox in The Wit’s Guide to Gambling, and some part of my brain is still spinning on the roulette table.) If you simply must have cocaine or hot fudge sundaes or hot cocaine fudge sundaes, the immediate pleasure and later pain are in different modalities. And so Ainslie concludes that money is a MacGuffin because it’s “the object of a hedonic game that is justified by its instrumental believability but which is actually shaped by its production of satisfaction in its own right.” Ergo, capitalism is a Hitchcock movie….
– source
Ainsle’s essay, prepared for a conference on addiction, is eminently worth reading and pondering.
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As we turn our backs on baccarat, we might recall that it was on this date in 1960 that “Money (That’s What I Want)” by Barrett Strong entered the Billboard Hot 100. Written by Berry Gordy and Janie Bradford, the single was the first hit record by Gordy’s Motown Records (released on Motown’s Tamla label). The song peaked at #23 in April and was the only song recorded by Strong that reached the Hot 100, though Strong went on to write many of Motown’s biggest hits. It was, of course, covered by The Beatles, among many others.
And we might note that today is the first day of a “prefectly square” month…
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