Do gamblers invest differently?

The stock market is often compared to a casino, but what happens when you ask gamblers to come to a lab and trade in stocks?

A new study asked 600 recruits to participate in a lab experiment where they could trade in a simulated stock market. The trick was that the volunteers were randomly confronted with either a highly volatile market or a low-volatility market, and the researchers wanted to know if people behaved differently depending on the volatility of the stock market.

The first insight they gained was that, on average, people trade more in a volatile stock market. This is also what we observe in real-life markets. Transaction volumes spike when markets are highly volatile. Note, however, that in real life, markets become more volatile when things are going badly, and markets are dropping. In a lab experiment, the volatility was truly symmetric, and people still traded more in a more volatile market. Hence, what drives the increase in market volume on volatile days is not necessarily that people want to exit losing positions. Higher activity is also triggered by people trying to lock in large gains, which explains why, in a rising stock market, we often see volume increasing as share prices rise.

But what struck me was the result shown in the chart below. The study authors didn’t just confront the volunteers with high or low volatility. They first measured the volunteers’ risk of becoming addicted to gambling on the Problem Gambling Severity Index (PGSI). Indeed, what I didn’t tell you so far was that they recruited volunteers for the experiment based on the prerequisite that they had experience with both investments and gambling. This way, researchers can investigate whether gambling habits are linked to investment habits and, if so, how.

If you move from left to right in the chart, you can see how many trades the gambler-investors made in the lab experiment as their risk of problem gambling increases.

I would emphasise two things here:

• People who are at higher risk of problem gambling also tend to trade more in stock markets. So a propensity to gamble translates into investment behaviour. And we know that people who trade more tend to have worse returns due to transaction costs and other frictions that eat away at the returns. Hence, in real life, people who are naturally inclined to gamble should also have lower returns.

• Most people trade less in a low-volatility market, which means that as long as markets remain calm, their returns should be better. But for the most extreme gamblers, it doesn’t matter whether the market is low volatility or high volatility. They will always trade a lot. They truly are compulsive gamblers, no matter the environment they are in.

Trading frequency vs problem gambling severity

Source: Weiss-Cohen (2025)