Thread by @alpsimsek_econ

The GameStop saga has many interesting dimensions. But there is an aspect that I don't think is sufficiently appreciated. In general, retail speculation hurts the retail traders the most. Platforms like Robinhood made the problem worse by making speculation cheaper and easier 1/n

Empirical evidence shows that speculation by individual investors substantially lowers their returns, due to excessive risks, transaction costs, and a poor ability to pick stocks and to time the market. See the excellent review paper by Barber&Odean 2/n

sciencedirect.com/science/articl…

While retail investors tend to lose, institutional investors on average make money—both because they collect the transaction costs, and because they have stock picking and market timing ability and take the other side of retail trades. Imagine gambling: The house always wins 3/n

We are talking about potentially very large losses and gains here. For instance, Barber, Lee, Liu, Odean (2009) find that individual investors’ portfolio losses in the Taiwan stock market amount to 2% of Taiwanese GDP over a five year period! 4/n

academic.oup.com/rfs/article-ab…

In the GameStop saga, retail traders were able to coordinate. This enabled some of them to have a good run and make some money (so far). A few institutions suffered. But the big picture is completely the opposite. 5/n

Imagine a boxing match where an underdog goes against professional boxers and is regularly crushed. Underdog has one good hit. The audience starts to cheer on, but this is not the ideal response. Ideally, there shouldn't be a boxing match between these two sides to begin with 6/n

Robinhood and other brokerage firms restricting trading abrubtly is not fair (although they did for technical/prudential reasons). However, there is a broader debate to have about whether we need so easy trading to begin with, especially of complex securities such as options 7/n

"Democratizing finance” sounds appealing but it doesn't really make sense. Optimal textbook investment is straightforward: buy the market portfolio, and make minor adjustments. For investments, more choice doesn't necessarily improve welfare. Empirically, it lowers welfare 8/8