Participants in a simulated market environment displayed behavior indicative of market timing, even when there was an incentive not to do so. Excessive trading was found to occur, with participants attempting to buy low and sell high. This activity was repeated even after feedback was given about the impact of their activity. Analysis showed trading being driven by “risk-loving attitudes” and a willingness to “beat the market.”

The experiment occurred at the University of Amsterdam in 2014. Approximately 200 participants were divided into nine experimental markets. Each participant started with 100 francs and could decide during each 20-second period whether or not they wanted to be invested (holding the virtual shares of stock). Information on prices, returns, individual holdings and price forecasts were displayed throughout the session. When a trade was placed, the price of the stock was impacted.

Participants were told to expect the asset would appreciate at an average rate of 2% per period and that the game may stop randomly. As such, there was an incentive to simply buy the asset and not make any other transactions. Doing so would have resulted in an “almost certain gain of over 600% if they bought shares in the first period and held them until the end of the experiment.”

Rather than buy and hold, investors traded. Even after being made aware of the price impact of doing so (buying pushed share prices up and selling pushed share prices down), trading activity during the first session was so high that participants’ profits were only 10.7% on average. During the second session, participants curtailed their trading behavior somewhat, but not enough. Average earnings during the second session were 105%.

One factor at play was the inability to benefit from compounding by having less to invest. The study’s authors observed, “Players trade so much that they keep eroding their wealth when they sell (due to the negative impact on price) and affording fewer and fewer number of shares when they buy (due to the positive impact on price). This accounts for a negative impact bias on average and results in very low earnings at the end of the session.”

Source: “Do Investors Trade too Much? A Laboratory Experiment,” Joao da Gama Batista, Domenico Massaro, Jean-Philippe Bouchaud, Damien Challeta, and Cars Hommes, Journal of Economic Behavior & Organization accepted manuscript.

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