Steaming - UC Berkely Research

An interesting research thesis was done at UC Berkely. A link to an article based on the thesis is below. The author studies transactions from accounts at a national discount broker and finds that people irrationally sell stocks when they are up and hold stocks when they are down. This is done much to the account holders' detriment.


The finding supports the "disposition effect" which says that people tend to be risk averse when they are "up", but risk inclined when they are "down".


Applied to poker it would imply that players tend to make -EV bets when they are down. In other words they steam. This should be no surprise to any of us, but the point is that one could avoid steaming if he always convinced himself that he was "up".


http://faculty.haas.berkeley.edu/odean/papers/disposition/disposition.html

Some people say I have a weird feel, a sixth sense for stock-price direction. But a lot of times my trading was up big and down.


What I figured out, was that I would just buy and sell when I felt like it when I was down, or poor, or near broke, whatever.


But then, once I got up a good amount of money, selling when I felt like it wasn't good enough. I'd start trying too hard.


So yes, I had this experience, except I traded a lot worse when I was risk averse. Because I had no explanation for my pos EV.


Meaning, when I was risk-welcoming, I didn't care that I had no explanation for my profits. But I lacked the confidence when risk averse.


Anyway, the beauty of it is, I am a master at starting from zero and taking off like a rocket! So I have no fear of going broke.


But then when I wasn't broke any more, I started to get scared, or something. Or when the client tells me to take less risk!


It's like, um, I'm buying and selling for no apparent reason! To not take risk is to stop doing what I'm doing!


eLROY

i think it has nothing to do with risk but feeling good. by taking profits when a stock is up you get to feel good. and when they are down you get pain from selling so they hold the stock in hopes it returns and then can put off the pain. we all do this stuff to some extent.

I think the author would agree that account holders are acting the way they do because it feels good to them. But this behavior is detrimental to the goal of getting the best rate of return after tax for a given level of risk. One pays less tax if he defers his capital gains until later and realizes capital losses earlier - The opposite tendency of the investors studied.


If you consider holding stock to be taking a risk, then the behavior is consistent with the utility function that prefers risk aversion when one is "up" but is risk seeking when one is "down".


The author concludes that the account holders studied are irrationally risk averse when they are up, and irrationally risk seeking when they are down.


A poker analogy would be people who like to "hit and run". At best this is useless. But I think some players are distracted by the goal having a winning session and consequently do not play their best. Also, if you consider in your hourly rate the time it takes to travel to a cardroom and wait to get into a game, then it would hurt your hourly rate.