The "Sapin II" law on the transparency of economic life will be presented on Wednesday to the Council of Ministers. Among the many measures to combat corruption and scams of any kind, the bill of our dear Minister of Finance foresees the prohibition of advertising for online trading sites (Forex, binary options ...).
But then, the government now wants to prevent us from becoming rich in a week through infallible investment strategies? Calm, calm! First of all, it is important to understand that the trader who gains 10,000 euros a month by staying at home and having no knowledge of the stock market is a beautiful urban legend (or a huge scam ... to choose from) .
But, besides sites of scams and false advertising, is it really possible to earn money on the stock market? And more precisely, is it possible to beat the market? SPOILER: The answer to the first question is YES (but be careful to read the rest) and the answer to the second is NOT REALLY ... FINALLY PERSON DOES NOT KNOW MORE.
Trader to earn money
It is indeed possible to earn money by trading on the financial markets ... but it is also possible to earn money by going to the casino or playing poker (absurd, but not that much).
What is important is therefore not only the possibility (or impossibility) of earning money, but the answer to the following two questions: (1) what is the average gain / loss ( The expectation of winning) and (2) is it the talent or the luck that differentiates the winners from the losers? In the case of the casino (slot machine), this sounds fairly simple: expectation of negative gain and 100% chance / 0% talent. In the case of poker, idem: expectation (average, on all players) of negative gain (zero-sum game with commission + rake), a big part of talent and a bit of luck (in the long term). But in the case of financial markets, the answer is more complex ... and variable according to financial products.
According to a study by the AMF on the foreign exchange market (source: "Study of the results of private investors on CFD and Forex trading in France"), 90% of the clients are losers, with an average loss of more than 10,000 euros. But how can we explain why so many people are still attracted to this market? Three explanations are possible: (1) selection bias, (2) poor perception of random phenomena, and (3) overconfidence.
First, whether in the media or in your knowledge circles, the spotlight is often focused on the winners. Honestly, if you have lost 500 euros as a naze on a trading site, you are not going to tell it too much. If on the other hand, often by chance, you have won 500 euros, this will make a nice topic of discussion to make you lather with your friends at the aperitif. The perception of the distribution of earnings is therefore biased, which can give the impression that there is easy money to win ... and thus make you want to register.
Second, the purely random nature and the concept of probability are generally poorly controlled. For example, if you put in a room 1024 people who randomly bet all their wallets (100 euros at the start) on the rise or fall of an action (binary option: the double bet in case of a good "bet" ), Then you will have (average) 1 person among the 1024 who will end with a portfolio of more than 100,000 euros (10 "wins" as a result). You are going to say to yourself, "Wow, I'm too strong, I want to follow the advice of this genius", when in reality it's just a random phenomenon and the gain of this "financial expert" is only due to luck 2 power 10 = 1024).
Finally, but this is somewhat related to the two previous explanations, individual investors are subject to many behavioral biases (see, for example, "The Behavior of Individual Investors", Barber & Odean) as an excess of confidence (I am better than the average, I am going to win) and this magnificent ability to appropriate victories ("my brilliant strategy has still worked") while being unloaded in case of defeat (" I lost money, but it's not my fault the market has done anything ").
Can we beat the market?
Be careful though: the expectation of gain is not zero (or negative, once the transaction costs are taken into account) on all financial products. If we consider, for example, the market share, then the expectation of gain is positive. On average, and over a long period of time, the equity market increases, and the (positive) return is in fact a mere reward of the risk taken by the investor (financial theory 101). The main issue
****Text original: https://www.contrepoints.org
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