Competition for visibility: When do (FX) signal providers employ lotteries?
Julian Schneider and
International Review of Financial Analysis, 2021, vol. 78, issue C
We argue that certain currency pairs, similar to stocks, are perceived and employed as gambling opportunities. We define currency pairs with extreme positive daily returns as lotteries. By analyzing data from a popular foreign exchange focused social trading platform, we provide empirical evidence of a U-shaped relationship between previous relative trader performance and the traded lottery share: Traders with bad performance and traders with good performance, in comparison to their peers, are more prone to gamble, i.e. trade a higher monthly share of lotteries. Regarding both sides of the relative performance spectrum, we link our results to well-documented behavioral phenomena. Furthermore, we relate our results to remuneration design features common to social trading, where only outperformers gain visibility and may become eligible for receiving compensation form the platform vendor. In consequence, especially signal providers at the lower end of the performance spectrum are incentivized to gamble; after (repeatedly) performing poorly, traders might be willing to take gambles for a small chance to get a declining account back on track.
Keywords: Foreign exchange trading; Gambling; Social trading (search for similar items in EconPapers)
JEL-codes: G11 G40 G41 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s1057521921002192
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