How "Active" Investing and Trading Can Mimic Gambling

Key Points 

• Active investing and trading can become addictive, like gambling

• There are shared personality traits between those who gamble and actively invest/trade

• There are ways to help identify when investing or trading is becoming harmful 

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More than 20 years ago, Mark Hebner published a 12 step program guide on how to recover from active investment addiction. While this notion seemed far fetched back then, today’s research is showing that investing and trading share many similar concerns with gambling behavior. The term “prediction addiction” paints a picture of how smart investors can easily become addicted to the thrill of big-risk, big-reward investments, rather than smart and sensible trades.  

What is “Active” Investing? 

Active investing involves a more hands-on approach to the market and often entails buying or selling certain stocks based on how the market is performing. People actively make decisions about individual investments to try to beat the market. It often involves frequent trading, whether that be daily or weekly moves. 

By comparison, others more passively invest in broad market indexes or funds and hold them long-term, without trying to time the market. It’s a buy-and-hold strategy that involves minimal trading. 

Active investing involves a lot of research and strategic trades that are meant to “out-perform”. Factors that impact active investing tactics include politics, the economy and market trends. Active investing can easily become problematic or volatile as it tends to be based on riskier, face-paced trading patterns. 

Similarities between Active Investing and Gambling 

Active investing may seem like a legitimate way to try to make a profit (or even a living), especially if an individual uses a wealth manager or online investment platform, along with sound research, to make investments. Those who engage in riskier trading behaviors often choose to make trades themselves and invest extensive time and energy trying to outsmart the market and make significant profits.

Construct of investing, trading: Risk in hopes of profit

Like gambling, active investing comes with risk, as it is more volatile and there are no guarantees that someone will profit on their investment choices. Investing can become addictive and harmful when someone is unable to manage their trading behavior and it negatively impacts their daily life. 

Gambling and active trading both involve:

• Risk and potential loss/profit

• Outcomes that are not perfectly predictable

• Short-term focus

• Dopamine rush, potentially addictive in nature

Activation in the brain 

Active investing and trading has been found to activate areas of the brain that are also impacted with gambling addiction. Research has found similarities in the psychological characteristics of those who participate in gambling and investing. Both groups displayed behaviors including:

• Sensation-seeking or risk-taking

• Competitiveness

• Emotional instability/Impulsivity

• Overconfidence

• Confirmation bias

• Illusion of control

Signs of a Problem with Active Investing, Trading

It can be difficult to determine if trading tendencies are becoming addictive or harmful when investing is a legitimate way to earn money, if it is done in a regulated and healthy way. There is a fine line between day-to-day investing and high-risk or impulsive trading behaviors. 

Signs of a problem with active investing or trading can include:

• Trading impacts on mental health

• Notable financial impact

• Changes in behaviors or habits

• Social isolation

• Inability to stop trading or investing

• Increased risky trading decisions

Treatment and support options available

If you or someone you know is struggling with uncontrolled active investing or trading, there are support options available. Treatment for active investing may include therapy, mutual support groups, literature, friends and family or outpatient services. 

Birches Health offers 100% virtual therapy with professionals who are trained in treating gambling addiction and issues with trading or investing. Birches help reduce barriers to support by providing specialized treatment from the comfort of one's own home. Birches also works with most insurance carriers to help reduce the cost of treatment.

You can speak with the Birches team at 833-483-3838 or email help@bircheshealth.com to connect. Or if you’re ready for care now and want to book an appointment, simply click here to schedule one right away.