Lessons learned from day trading and eBay

Both are easy to start. With an amount equal to a month rent, you can open a trading account and even receive a US$100 (Bt3,400) cash bonus at times.

The trading account affords one the ability to invest in stocks, bonds and a wide array of deriva¬tives, many of which are unavail¬able in Thailand even today. On eBay, an online market, you can buy and sell almost anything through the Internet - books, fur¬niture, automobiles, you name it. Trading is done through a bid¬ding system. After each transac¬tion, you are rated by your coun¬terparts, and you can develop a strong online reputation after only a few transactions.

The two avenues provide out¬lets for testing your investment and business skills. Reallife impacts make these outlets fun and even addictive for students. But if left unchecked, they can develop into dangerous obses¬sions. Take day trading for instance. US markets allow online trading of stock options. Options, once purchased with a deposit, give you the choice to accept or decline a subsequent trade. You accept if there is money to be made. If the next trade is unprofitable, you decline and lose your deposit. While you can make many times the pur¬chase price of the option, you can also lose the entire deposit. Losing the deposit is losing 100 per cent of your investment; hence, the dan¬ger.

I personally learned much about my own behavioural pat¬terns through these two activi¬ties, with which I clocked count¬less hours of online excitement. I vividly remember how one day was ruined when I was unsuc¬cessful in selling a book on eBay for more than what I paid for it. Normally, I would make money buying books cheaply during odd hours and selling during the time when lots of people tended to bid. This time I failed. While my mistake cost me about $2, the pain was excru¬ciating, because my confidence was battered.

Even the good news that hap¬pened next could not lift my spir¬its. That afternoon, the stock market shot up a decent 3 per cent. The stock option I invested in almost doubled in value, earn¬ing me a handsome profit. However, the feeling that is etched in my memory is not the euphoria of making money, but rather the fact that even though I made several times the amount I lost on eBay, I still felt miserable about my puny $2 loss.

I would later come to under¬stand this feeling under a behav¬iouralfinance concept known as "loss aversion". This term is used to describe the fact that people tend to attach more weight to losses than to gains, even though it may be irrational to do so. It was irrational for me to feel depressed with my small loss despite making an overall net profit that day.

Another simple example: imag¬ine you are at a party, and there is a one in 20 chance you will win a lucky draw prize. What do you feel your chances are? Suppose during the same lucky draw, terrorists suddenly storm the place and demand one hostage from your group of 20 people. What are your chances now? Most people view their chances for gain differently from their chances for loss, even though the probability may be exactly the same. In fact, studies have indicated investors may even exhibit extreme behavioural changes, such as a change from risk aversion to risk seeking, under those different conditions. Understanding such innate ten¬dencies of human nature will help you to manage your portfo¬lio better.