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Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of thos

Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. The bigger problem is that this is rarely just a one-time decision to gamble. And repeatedly doing this is statistically pretty certain to lose you significant amounts of money—particularly when compared to just investing in the market as a whole—over the long run. It’s just another way that the poor are trapped in poverty, even though you can of course always find individual cases where someone got lucky and made millions. This is one of the reasons I think Robinhood is a fundamentally an evil company. It’s been pretty conclusively demonstrated that the more trades you make as a retail investor, the worse your returns. To wit: Fidelity did some internal research on their customers to see which cohort had the highest returns. The winning cohort? The dead. Dead people don’t make trades, and so perform better than the living who do. I’d be willing to bet a large sum of money that Robinhood’s internal metrics conclusively prove that the net effect of their existence is a wealth transfer from the poor to the rich. The real Robin Hood-esque company in this whole thing is Vanguard, who have almost certainly done more than most any other company in this space to return profits from the market to customers of all wealth ranges.

dehrmann 6y ago
> The real Robin Hood-esque company in this whole thing is Vanguard This. I do worry a bit that there's something I'm missing because Vanguard is a Boomer thing that's no longer relevant, but I suspect all the research is solid and Vanguard being shareholder-owned aligns interests. Robinhood is probably just clever marketing and gamification of stock and options trading.
- threedots 6y ago
  No you're good. I'm a career hedge-fund/market guy and all of my investable assets (outside of my company and my house) are in vanguard trackers. I'd guess most of my friends who are professional investors are the same (except they likely have some investment in their own fund). That's not to say there aren't better investment options in the world but they aren't accessible to ordinary people (even quite rich ones).
  - dehrmann 6y ago
    > I'd guess most of my friends who are professional investors are the same I'm curious about this. Hedge fund guys make enough to be accredited investors, but they mostly don't invest in them? Are the minimums too high? Are the yields not that great? I know the 2010's weren't great years for hedge funds. I also halfway wonder if the real product hedge funds sell is complex strategies to pension fund manages who think it's hard to explain their job if they're just buying index funds.
    - threedots 6y ago
      It's a good question. I can only speak for myself but I would only be interested in investing in a very small number of funds and they don't want my money (or sometimes anyone's money). Unless you are convinced a fund adds value after fees it's very hard to justify when you can construct your desired market exposure with passive products which are much cheaper and more liquid. It's painfully boring to do that so like everyone else I'm tempted to punt on sexier things every now and again but most of the time I don't. To answer your last point, there's some of that for sure - in many parts of finance complexity is good for margins. And yes it's tough to demonstrate much value if your investing process amounts to placing buy orders for index funds. It's not all bad incentives though, hedge funds can offer uncorrelated (to the wider market) returns which are very valuable in a portfolio.
      - dehrmann 6y ago
        > or sometimes anyone's money Medallion...
conformist 6y ago
These are good points and the lottery analogy seems quite accurate. I think, there may be an additional macro-aspect to this: If you are a young person with a four-figure net worth, you should be able to leverage this to buy (non-financial) options that have a much higher expected payoff than hyped stock options. For example, being able to quit a job to apply for others, moving to another town, spending additional time and money on education or similar. These are all options that you haven't got without the four-figure net worth. The real tragedy is that these options seem to be becoming more expensive or scarcer. Many are still better than an iterated lottery, but the (perceived) decline in optionality may be worthy of some sympathy. (Completely agree on Vanguard.)
PartiallyTyped 6y ago
Being a 4 digit net worth grad student in Europe, riding a few meme stocks just for a short-while has increased my 'wealth' and given me tremendous amount of financial freedom. I understand that the odds are against me, but really, the expectation even when accounting for variance, and adjusting for risk tolerance are a no brainer to me. I made >40% of my net worth in the first 2 weeks of January alone, and with GME I have multiplied my net worth by (>tenfold). Yes I understand that these are 'extraordinary times', but accounting for everything. I have literally nothing to lose. I can fast for a week if I need to, I can walk instead of taking the metro. Whatever. I am not going to lose a lifestyle that I never had and I never had a safety net to begin with because being a 4 digit net worth student doesn't give you any safety net. Keeping track of my bets even before getting into this, I was right more often than not, and I am aware of survivorship bias and confirmation bias. In the limit, it makes more sense to spend 4-5 hours per day learning about market analysis, observing trends close to me and making decisions about sectors/fields that I know about.
- tylerhou 6y ago
  In the short term, when someone gains in the stock market, someone else loses. Because of “invisible” transaction fees that go to Wall Street, retail is losing on net. So in the bigger picture, small investors aren’t winning, despite our insistence that we are. Some of us are winning. Most of us are losing. And the net result is that Wall Street is getting richer. That’s not good.
  - uyt 6y ago
    Expected value (a straightforward sum of total money in the system) is the wrong way to look at it. His point is that the expected utility of these gambles is still positive for people who have nothing.
    - tylerhou 6y ago
      Expected utility is positive implies that people have discontinuous utility functions wrt. money. That is, utility will jump significantly after reaching a certain net worth. Another explanation that is consistent with gambling behavior is that people have inaccurate risk functions; that they overestimate positive upside and underestimate downside. I am not familiar with the economic literature. But I believe that there is more evidence to support the second hypothesis. Behavioral economics has showed that humans are notoriously unable to estimate risk accurately. I have not seen as much evidence that humans have discontinuous utility functions. Behavioral economics also tells us that humans are also terrible at estimating their actual utility functions. So I also don’t trust the original poster who claims that they have a discontinuous utility function. The only way to test that is to observe actual human behavior.
jcims 6y ago
>Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. One difference here is the solidarity aspect of meme stocks vs lottery.
throwaway2245 6y ago
> Your observation about young people... equivalent of those living paycheck-to-paycheck “investing” in the lottery. You're so close to uncovering something here...! Why do you think so many people play the lottery?
- ghaff 6y ago
  I'm sure there are many reasons. But many boil down to: I (rightly or wrongly) think a few lottery tickets don't really matter to my ability to eat/make rent/etc., it's fun to dream, and it's the only way I'll ever have even a remote chance to be "rich."
  - tertius 6y ago
    Spending your whole life betting on options won't get you anywhere compared to index funds.
im3w1l 6y ago
So something I've been thinking about: Living people enter the market when they make money, and they do that in a correlated way (times of high employment). And they exit the market in a correlated way to spend on retirement or college or whatever. Entering and exiting when everyone else do means you get a bad price.
- deleted 6y ago
  [deleted]
sokoloff 6y ago
I agree with your points on trading frequency, but I still think Robinhood is good for people rather than bad. I think the alternative destination for a lot of that Robinhood money isn’t “Vanguard VTSAX” but rather slightly positive lifestyle inflation/expenses. To the extent that’s the case, all the gamification and reinforcement is creating a behavior that’s better than the likely alternative. (Returns are not good if your total lifetime investment trades are zero.)
- stouset 6y ago
  I've been debating a lot in these comments, but I do want to take the time to appreciate this point of view. It's definitely one I hadn't considered. If Robinhood is getting people who otherwise wouldn't save to invest, even if they're getting worse returns than they would at somewhere like Vanguard, then I could definitely reconsider my perspective that they're a net-evil. I'm not entirely sure I buy that story, but it's absolutely a reasonable perspective and one I'll keep in mind in the future when evaluating new information about Robinhood.
dataflow 6y ago
> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. It's not—the lottery is by design guaranteed to have negative expected returns. The stock market isn't.
- graeme 6y ago
  Stock trading has negative expected returns compared to buy and hold though.
  - pashamur 6y ago
    Not sure whether it makes sense to average all returns and call it "negative expected returns" across the board. As with any game that mixes luck & skill (like poker), trading has a variety of expected returns. My guess (based on poker) is that a large part of people are small losers or break-even (in poker because of rake, in trading because of trading fees), some are big losers (in poker called whales), some are small winners (regs), and some are big winners (truly good players / traders). It's not easy figuring out in the beginning which bucket you fall into, but if you accurately track your poker / trades over time, then with a large enough sample size (assuming proper risk management of course) you should be able to figure it out.
    - graeme 6y ago
      Sure but the comment I was replying to was referring to young people with four figure net worths gambling on options. There are some successful traders but I strongly suspect those trading options with four figured are in lottery world. A few win big, most lose all, aggregate expected returns negative.
the_local_host 6y ago
> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. But when you "invest" in the lottery, you don't get to help blow up a hedge fund. I think many of the retail participants in the GME phenomenon find some entertainment value in what they're doing. That said, I do think Robinhood makes it too easy for people to put on positions that they simply don't understand. The fiasco with "1R0NYMAN" comes to mind.
rubicon33 6y ago
> The real Robin Hood-esque company in this whole thing is Vanguard, who have almost certainly done more than most any other company in this space to return profits from the market to customers of all wealth ranges. This is true but unfortunately it's one of those situations where you need money to make money and even then it's a slow multi-decade long process. Culturally young people find themselves in something of a vice grip. We are a consumerism culture hell bent on producing and acquiring the next best thing. Patience and presence of mind over financials are diminishing skills, yet you need both of these if you intend on retiring through owning stocks.
- stouset 6y ago
  Absolutely. 4% inflation-adjusted returns aren’t going to turn a single contribution of $1,000 into $1,000,000 in anyone’s lifetime. We have a massive economic problem where the young and the economically disadvantaged face massive challenges achieving financial security. And without the spare funds to contribute non-trivial amounts regularly (and the financial education to buy-and-hold through thick and thin), even somewhere like Vanguard isn’t going to wildly change people’s fortunes. I don’t know what the answer is (although I have some educated guesses) but what I know doesn’t really help is glorifying a gambling regime where one in millions gets filthy rich, one in tens of thousands gets kind of rich, one in hundreds does maybe a little better than the market, and everyone else is effectively donating what little they do have to the Wall Street elite.
  - throwaway2245 6y ago
    > the financial education to buy-and-hold through thick and thin I find this somewhat dubious. If you buy-and-hold for a lifetime, you'll face at least a once-in-a-lifetime level of shock at some point. The possibility that this shock will happen just when you need the funds occurs fairly regularly to generations of retirees: but always seems to be forgotten by gold-standard financial advice.
    - devlopr 6y ago
      That's why you move from a risky stock portfolio to a safer bold driven portfolio as your age increases.
WalterBright 6y ago
Oh, I figure people will get over wildly speculating in stocks and transition to a more steady hand at it, which will be good for them and the economy. Kind of like I got over my wild days behind the wheel and drive pretty conservatively today.
hansvm 6y ago
> The bigger problem is that this is rarely just a one-time decision to gamble. And repeatedly doing this is statistically pretty certain to lose you significant amounts of money—particularly when compared to just investing in the market as a whole—over the long run. It’s just another way that the poor are trapped in poverty, even though you can of course always find individual cases where someone got lucky and made millions. Even with negative expected value, playing a lottery could be a rational decision given the right motivations and circumstances. Suppose for some reason you expect to be living paycheck to paycheck your entire life, barely having any surplus, and that there's nothing meaningful you can do to alter that trajectory. Investing scraps every month at 10% average returns (especially if you don't start till you're 30+) might allow you to retire a month or two sooner, buy slightly newer clothes, or maybe eat out a few more times each year, but even if you just lit that cash on fire you wouldn't have a substantially different life. However a few chances at $250k+ could fundamentally alter your possibilities, giving you a freedom that you otherwise couldn't dream of.
Uptrenda 6y ago
Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money. Treating people like children for taking risks and assuming they are too incompetent to judge the consequences is condescending as hell. The simple truth is Game Stop was a good trade, and I think comparing stocks to lottery tickets is very inaccurate. Stocks give you all kinds of numbers and information about the company which is just a little more transparent than staring into a random number generator. They have been called risky. But there are far more volatile positions to be holding.
- autoditype 6y ago
  > Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money. We have assumed that, and it's turned out to be generally a terrible assumption, with most US earners not being able to manage a $500 expense and being indebted to credit card companies
deleted 6y ago
[deleted]

dehrmann 6y ago

> The real Robin Hood-esque company in this whole thing is Vanguard This. I do worry a bit that there's something I'm missing because Vanguard is a Boomer thing that's no longer relevant, but I suspect all the research is solid and Vanguard being shareholder-owned aligns interests. Robinhood is probably just clever marketing and gamification of stock and options trading.

threedots 6y ago
No you're good. I'm a career hedge-fund/market guy and all of my investable assets (outside of my company and my house) are in vanguard trackers. I'd guess most of my friends who are professional investors are the same (except they likely have some investment in their own fund). That's not to say there aren't better investment options in the world but they aren't accessible to ordinary people (even quite rich ones).
- dehrmann 6y ago
  > I'd guess most of my friends who are professional investors are the same I'm curious about this. Hedge fund guys make enough to be accredited investors, but they mostly don't invest in them? Are the minimums too high? Are the yields not that great? I know the 2010's weren't great years for hedge funds. I also halfway wonder if the real product hedge funds sell is complex strategies to pension fund manages who think it's hard to explain their job if they're just buying index funds.
  - threedots 6y ago
    It's a good question. I can only speak for myself but I would only be interested in investing in a very small number of funds and they don't want my money (or sometimes anyone's money). Unless you are convinced a fund adds value after fees it's very hard to justify when you can construct your desired market exposure with passive products which are much cheaper and more liquid. It's painfully boring to do that so like everyone else I'm tempted to punt on sexier things every now and again but most of the time I don't. To answer your last point, there's some of that for sure - in many parts of finance complexity is good for margins. And yes it's tough to demonstrate much value if your investing process amounts to placing buy orders for index funds. It's not all bad incentives though, hedge funds can offer uncorrelated (to the wider market) returns which are very valuable in a portfolio.
    - dehrmann 6y ago
      > or sometimes anyone's money Medallion...

conformist 6y ago

These are good points and the lottery analogy seems quite accurate. I think, there may be an additional macro-aspect to this: If you are a young person with a four-figure net worth, you should be able to leverage this to buy (non-financial) options that have a much higher expected payoff than hyped stock options. For example, being able to quit a job to apply for others, moving to another town, spending additional time and money on education or similar. These are all options that you haven't got without the four-figure net worth. The real tragedy is that these options seem to be becoming more expensive or scarcer. Many are still better than an iterated lottery, but the (perceived) decline in optionality may be worthy of some sympathy. (Completely agree on Vanguard.)

PartiallyTyped 6y ago

Being a 4 digit net worth grad student in Europe, riding a few meme stocks just for a short-while has increased my 'wealth' and given me tremendous amount of financial freedom. I understand that the odds are against me, but really, the expectation even when accounting for variance, and adjusting for risk tolerance are a no brainer to me. I made >40% of my net worth in the first 2 weeks of January alone, and with GME I have multiplied my net worth by (>tenfold). Yes I understand that these are 'extraordinary times', but accounting for everything. I have literally nothing to lose. I can fast for a week if I need to, I can walk instead of taking the metro. Whatever. I am not going to lose a lifestyle that I never had and I never had a safety net to begin with because being a 4 digit net worth student doesn't give you any safety net. Keeping track of my bets even before getting into this, I was right more often than not, and I am aware of survivorship bias and confirmation bias. In the limit, it makes more sense to spend 4-5 hours per day learning about market analysis, observing trends close to me and making decisions about sectors/fields that I know about.

tylerhou 6y ago
In the short term, when someone gains in the stock market, someone else loses. Because of “invisible” transaction fees that go to Wall Street, retail is losing on net. So in the bigger picture, small investors aren’t winning, despite our insistence that we are. Some of us are winning. Most of us are losing. And the net result is that Wall Street is getting richer. That’s not good.
- uyt 6y ago
  Expected value (a straightforward sum of total money in the system) is the wrong way to look at it. His point is that the expected utility of these gambles is still positive for people who have nothing.
  - tylerhou 6y ago
    Expected utility is positive implies that people have discontinuous utility functions wrt. money. That is, utility will jump significantly after reaching a certain net worth. Another explanation that is consistent with gambling behavior is that people have inaccurate risk functions; that they overestimate positive upside and underestimate downside. I am not familiar with the economic literature. But I believe that there is more evidence to support the second hypothesis. Behavioral economics has showed that humans are notoriously unable to estimate risk accurately. I have not seen as much evidence that humans have discontinuous utility functions. Behavioral economics also tells us that humans are also terrible at estimating their actual utility functions. So I also don’t trust the original poster who claims that they have a discontinuous utility function. The only way to test that is to observe actual human behavior.

jcims 6y ago

throwaway2245 6y ago

> Your observation about young people... equivalent of those living paycheck-to-paycheck “investing” in the lottery. You're so close to uncovering something here...! Why do you think so many people play the lottery?

ghaff 6y ago
I'm sure there are many reasons. But many boil down to: I (rightly or wrongly) think a few lottery tickets don't really matter to my ability to eat/make rent/etc., it's fun to dream, and it's the only way I'll ever have even a remote chance to be "rich."
- tertius 6y ago
  Spending your whole life betting on options won't get you anywhere compared to index funds.

im3w1l 6y ago

So something I've been thinking about: Living people enter the market when they make money, and they do that in a correlated way (times of high employment). And they exit the market in a correlated way to spend on retirement or college or whatever. Entering and exiting when everyone else do means you get a bad price.

deleted 6y ago
[deleted]

sokoloff 6y ago

I agree with your points on trading frequency, but I still think Robinhood is good for people rather than bad. I think the alternative destination for a lot of that Robinhood money isn’t “Vanguard VTSAX” but rather slightly positive lifestyle inflation/expenses. To the extent that’s the case, all the gamification and reinforcement is creating a behavior that’s better than the likely alternative. (Returns are not good if your total lifetime investment trades are zero.)

stouset 6y ago
I've been debating a lot in these comments, but I do want to take the time to appreciate this point of view. It's definitely one I hadn't considered. If Robinhood is getting people who otherwise wouldn't save to invest, even if they're getting worse returns than they would at somewhere like Vanguard, then I could definitely reconsider my perspective that they're a net-evil. I'm not entirely sure I buy that story, but it's absolutely a reasonable perspective and one I'll keep in mind in the future when evaluating new information about Robinhood.

dataflow 6y ago

> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. It's not—the lottery is by design guaranteed to have negative expected returns. The stock market isn't.

graeme 6y ago
Stock trading has negative expected returns compared to buy and hold though.
- pashamur 6y ago
  Not sure whether it makes sense to average all returns and call it "negative expected returns" across the board. As with any game that mixes luck & skill (like poker), trading has a variety of expected returns. My guess (based on poker) is that a large part of people are small losers or break-even (in poker because of rake, in trading because of trading fees), some are big losers (in poker called whales), some are small winners (regs), and some are big winners (truly good players / traders). It's not easy figuring out in the beginning which bucket you fall into, but if you accurately track your poker / trades over time, then with a large enough sample size (assuming proper risk management of course) you should be able to figure it out.
  - graeme 6y ago
    Sure but the comment I was replying to was referring to young people with four figure net worths gambling on options. There are some successful traders but I strongly suspect those trading options with four figured are in lottery world. A few win big, most lose all, aggregate expected returns negative.

the_local_host 6y ago

> Your observation about young people with four-figure net worths thinking it’s rational to gamble it all on options is pretty much this week’s equivalent of those living paycheck-to-paycheck “investing” in the lottery. But when you "invest" in the lottery, you don't get to help blow up a hedge fund. I think many of the retail participants in the GME phenomenon find some entertainment value in what they're doing. That said, I do think Robinhood makes it too easy for people to put on positions that they simply don't understand. The fiasco with "1R0NYMAN" comes to mind.

rubicon33 6y ago

> The real Robin Hood-esque company in this whole thing is Vanguard, who have almost certainly done more than most any other company in this space to return profits from the market to customers of all wealth ranges. This is true but unfortunately it's one of those situations where you need money to make money and even then it's a slow multi-decade long process. Culturally young people find themselves in something of a vice grip. We are a consumerism culture hell bent on producing and acquiring the next best thing. Patience and presence of mind over financials are diminishing skills, yet you need both of these if you intend on retiring through owning stocks.

stouset 6y ago
Absolutely. 4% inflation-adjusted returns aren’t going to turn a single contribution of $1,000 into $1,000,000 in anyone’s lifetime. We have a massive economic problem where the young and the economically disadvantaged face massive challenges achieving financial security. And without the spare funds to contribute non-trivial amounts regularly (and the financial education to buy-and-hold through thick and thin), even somewhere like Vanguard isn’t going to wildly change people’s fortunes. I don’t know what the answer is (although I have some educated guesses) but what I know doesn’t really help is glorifying a gambling regime where one in millions gets filthy rich, one in tens of thousands gets kind of rich, one in hundreds does maybe a little better than the market, and everyone else is effectively donating what little they do have to the Wall Street elite.
- throwaway2245 6y ago
  > the financial education to buy-and-hold through thick and thin I find this somewhat dubious. If you buy-and-hold for a lifetime, you'll face at least a once-in-a-lifetime level of shock at some point. The possibility that this shock will happen just when you need the funds occurs fairly regularly to generations of retirees: but always seems to be forgotten by gold-standard financial advice.
  - devlopr 6y ago
    That's why you move from a risky stock portfolio to a safer bold driven portfolio as your age increases.

WalterBright 6y ago

Oh, I figure people will get over wildly speculating in stocks and transition to a more steady hand at it, which will be good for them and the economy. Kind of like I got over my wild days behind the wheel and drive pretty conservatively today.

hansvm 6y ago

> The bigger problem is that this is rarely just a one-time decision to gamble. And repeatedly doing this is statistically pretty certain to lose you significant amounts of money—particularly when compared to just investing in the market as a whole—over the long run. It’s just another way that the poor are trapped in poverty, even though you can of course always find individual cases where someone got lucky and made millions. Even with negative expected value, playing a lottery could be a rational decision given the right motivations and circumstances. Suppose for some reason you expect to be living paycheck to paycheck your entire life, barely having any surplus, and that there's nothing meaningful you can do to alter that trajectory. Investing scraps every month at 10% average returns (especially if you don't start till you're 30+) might allow you to retire a month or two sooner, buy slightly newer clothes, or maybe eat out a few more times each year, but even if you just lit that cash on fire you wouldn't have a substantially different life. However a few chances at $250k+ could fundamentally alter your possibilities, giving you a freedom that you otherwise couldn't dream of.

Uptrenda 6y ago

Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money. Treating people like children for taking risks and assuming they are too incompetent to judge the consequences is condescending as hell. The simple truth is Game Stop was a good trade, and I think comparing stocks to lottery tickets is very inaccurate. Stocks give you all kinds of numbers and information about the company which is just a little more transparent than staring into a random number generator. They have been called risky. But there are far more volatile positions to be holding.

autoditype 6y ago
> Alternatively: we could assume that people are capable of making their own financial decisions and don't need anyone to police what they do with their own money. We have assumed that, and it's turned out to be generally a terrible assumption, with most US earners not being able to manage a $500 expense and being indebted to credit card companies

deleted 6y ago

[deleted]