B. F. Skinner’s stock market
by Chetan Parikh
  
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In a book worth reading, The Indomitable Investor, the author, Steven M. Sears, offers a behavioral explanation for the cues that encourage gambling.

“The idea that simple cues can induce people to gamble, or assume financial risk without understanding the issues, is powerful in the financial world. The parallels between the stock market-especially the parts that appear on broadcast financial news-and casinos are undeniable. “If you go to the gambling casinos,” Knutson says, “people are wearing skimpy costumes, they're giving you free alcohol, there are bells and lights and things like that, which don't necessarily seem related to the odds of gambling. But these are cues that might activate brain regions that encourage risk taking and get people to gamble more.”

 

Las Vegas style cues are increasingly used to describe and frame investing. The stock market is regularly portrayed as a quasi-casino by major broadcast media whose television studios are filled with flashing lights and beautiful women and handsome men who enthusiastically and confidently comment on the passing scene. Big winners are widely praised and sometimes appear on camera to talk about their victories or offer their views. The most powerful cues are rising stock prices. They are unsubtle, incredibly seductive, and accompanied by such a celebratory cacophony that if Lazarus arose from the dead he would rush to trade stocks.

 

Rising stock prices arguably cause individual investors to behave like the rats behavioral psychologist B. F. Skinner manipulated to test his conditioning theories. In his now famous experiments, Skinner put a rat in a cage. He dropped food into a metal bowl. It landed with a thud. The thud caused the rat to scurry to the bowl. How does that differ from the investor who rushes to buy stocks after hearing someone talk (or shout) on financial TV shows? Eventually, Skinner changed the rates at which various behaviors were repeated to earn a reward. Soon, he concluded he had found gambling's primary mechanism. Why do people spend hours in front of a slot machine, pulling the arm again and again? Skinner says it is because of “variable-ratio reinforcement schedule.”

 

“It is familiar in gambling devices and systems which can arrange occasional but unpredictable payoffs. The required number of responses can be easily stretched, and in a gambling enterprise such as a casino the average rate must be such that the gambler loses in the long run if the casino is to make a profit,” Skinner wrote. His description sounds a lot like the plight of many investors.

 

The similarities between Sin City and Wall Street are ingrained in the market's culture.

 

“What’s the difference between Las Vegas and Wall Street?” goes an old stock market joke.

 

“In Vegas, they buy the losers drinks.””