Wall Street Journal on Men With “Crack Cocaine” Level Addiction to Crypto and Options Betting

The day after the Wall Street Journal ran Why This Frothy Market Has Me Scared, it published More Men Are Addicted to the ‘Crack Cocaine’ of the Stock Market. We encourage you to read both in full.

We’ll focus on the latter, which is an important and well-researched piece. But it is striking how its profiles of investment-gambling addictions ignore one issue and go light on another: how much of the lofty stock market levels are the result of the actions of frenetic traders, and how this compulsion is at least as much due to efforts by interface designers to create trading junkies as the Purdue Pharma schemes to create Oxycontin abusers. A problem, of course, is that drugs that create physical and psychological dependency aren’t viewed in our society as the same as being hooked psychologically, even though cocaine specifically is addictive only psychologically.

On the vertiginous market levels, we’ll see in due course whether hoary old notions are still operative. One is that bull markets don’t end until the last bear has thrown in the towel. I am old enough to remember the dot-com mania, when valuing companies that were never, ever, going to make a dime in profit based on “eyeballs” was seen as perfectly reasonable. People I had thought to be sane pretty much all came to try to get a piece of this supposed new paradigm, which included traditional companies trying to position themselves as Internet plays. Stock market investors do not seem to me to yet be that collectively deranged. But the Journal cites metrics that suggest otherwise. From its account:

Bulls are everywhere. Bears are hard to find. This shows up in sentiment, in surveys and in the capitulation of the permabears.

Sentiment is euphoric, according to Citigroup’s Levkovich indicator. This index combines lots of measures and suggests investors have only been more positive twice, in the postpandemic SPAC/cannabis/green bubble and in the dot-com bubble of 1999-2000….

Other signs of optimism. Investment newsletter writers have rarely been more bullish or less bearish, according to the weekly survey by Investors Intelligence. Households have never been so confident that stocks will rise over the next year, according to the Conference Board’s monthly survey.

And fund managers shifted after the election to be more overweight U.S. stocks than any time since 2013, pretty much as all-in on the U.S. as they have ever been, according to Bank of America’s survey. Money is pouring into funds at an exceptionally high rate too, close to new highs…

This time will be different. Rosenberg thinks investors have shifted away from the standard metric of price against one-year forward earnings to look further out, because of the prospects for an AI-driven productivity boom. Even those who think markets will eventually return to something like normal, such as Goldman Sachs, don’t expect issues soon.

Again, prototypically, market bubbles feature a blowout, where insane-looking prices spike high. The final giddy phase of the dot-com boom lasted three months. So the party may have some way further to run.

Now to the market addiction story, which makes very clear that “addiction” is no hyperbole. Men with financial speculation habits (it seems they are are all men) are showing up at Gamblers Anonymous and in therapists’ offices in increasing numbers. From the Journal:

At Gamblers Anonymous in the Murray Hill neighborhood of Manhattan, one man called options “the crack cocaine” of the stock market. Another said he faced hundreds of thousands of dollars in trading losses after borrowing from a loan shark to double down on stocks. And one young man brought his mom and girlfriend to celebrate one year since his last bet.

They were among a group of about 60 people, almost all men, who sat in rows of metal folding chairs in a crowded church basement that evening. Some shared their struggle with addiction—not on sports apps or at Las Vegas casinos—but using brokerage apps like Robinhood.

Many of the men, and scores of others around the country, discovered trading and betting during the pandemic boom that began in 2020. Some were drawn in by big wins in meme stocks and other viral stock sensations, leading them into even higher-octane wagers that offer the chance to put up a small amount of cash for a potentially mammoth return—or more often, a crushing loss.

Remember that Robinhood in particular was accused of setting out to generate not merely excitement, but a dopamine rush that users would seek out again and again. Forbes described how even the SEC took notice, in Dopamine-Driven Trading On Robinhood Raises Suitability Concerns For The SEC:

Suitability is an ethical issue as well as a legal issue. There is mounting evidence that for many investors, trading on Robinhood is totally unsuitable. At the top of my unsuitability list are investors who suffer from gambling addiction. In 2013, the American Psychiatric Association reclassified problematic gambling behavior from being an impulse control disorder, such as kleptomania, to being a disorder related to substance abuse and addiction, such as those associated with alcohol and drugs. Ironically, Robinhood was founded in 2013, the same year that pathological gambling was reclassified.

Gambling addiction is dopamine related, and is part of the phenomenon author Anna Lembke calls “Dopamine Nation,” the title of her new best seller. Lembke describes how addictions stem from people seeking pleasure, where sensations of pleasure involve dopamine flows rising above baseline.

Studies document that people who suffer from gambling addiction differ from others in at least two respects. First, gambling addicts find it more difficult to generate dopamine highs. Therefore, they need more powerful stimuli than others to induce the same kinds of highs. Second, relative to others, the executive portion of gambling addicts’ brains is weaker, which leads them to experience greater difficulty with self-control. Taking these two features together means that gambling addicts need to take greater risks to achieve the same psychological highs than others, and are more prone to do so, even when they know they might be behaving imprudently.

Using digital prompts, the Robinhood platform does a superb job of generating stimuli which activate the dopamine-based reward centers in its users’ brains. This can be akin to giving candy to a baby, and for gambling addicts akin to providing them with enough rope to hang themselves. There is research to suggest that a portion of the brain connected to vision plays an important role in regulating how much risk people seek, plausibly by impacting dopamine flows in regions of the brain associated with anticipation.

Mind you, social media sites also try to create compulsive users, reportedly by deploying emotionally charged items, which in practice often translates into extreme or provocative content, to generate engagement. But social media has a less strong visual element, and the platforms cannot generate particularly seductive items, but merely amplify what they see as the most enticing of user-provided material. The Addiction Center identified some Robinhood design elements that hooked vulnerable customers:

Is The App Promoting Gambling?

One of the earmarks of gambling is volatility. Some days you win a jackpot, and the next, you could lose $7,000. It is essentially what makes gambling so attractive. Unfortunately, it is a huge problem in the United States. Roughly 1% of adults are battling a gambling disorder, which is why researchers and competing companies are sounding the alarm on Robinhood. According to whistleblowers, the app is using exploitative practices to induce gambling in its users.

Robinhood’s Design

Much like gambling apps, experts claim Robinhood uses cues that promote addiction. The behaviors are similar to a gambling disorder. For example, when a new member joins the platform, an image of a digital scratch-off lottery ticket pops up on their screen. The picture is a welcome stub, a gift for joining Robinhood’s community. The app’s stub promises a free share of stock worth anywhere from $2.50 to $200. If the new trader wants the prize, they have to play by ”scratching off” the image like a lotto ticket.

At first, the interaction seems harmless, even fun. Yet, Keith Whyte, the National Council on Problem Gambling executive director, warns that Robinhood’s styling has features like common betting apps. He claims it encourages immediacy and frequent engagement. Through its design, Robinhood induces dopamine rushes (pleasure neurotransmitter).

By promising a free yet unknown gift, the company immediately triggers dopamine responses among their new users. The trigger is what keeps them coming back.

Some of Robinhood’s many alleged dopamine inducing features include:

• Green confetti to celebrate transactions.
• A constant update of stock related articles.
• A colorful, eye-catching interface.
• Emoji phone notifications.
• One-click trading for instant gratification.
• Free stocks in the shape of lottery tickets.
• Waitlists where users can improve their position by tapping up to 1,000 times per day.

Research indicates that a flow of uncertainty and rewards hooks users. Much like drugs or alcohol, incertitude stimulates the brain’s reward system. Over time this repeated exposure can lead to addiction. Other studies show that volatility can even enhance cravings or the desire for drugs. The market’s waves and Robinhood’s fun interface are keeping users too loyal.

We’ll return to the Journal to get some crude indicators of the growth and current extent of this problem:

Doctors and counselors say they are seeing more cases of compulsive gambling in financial markets, or an uncontrollable urge to bet. They expect the problem to worsen. The stock market has climbed 23% this year and bitcoin recently topped $100,000 for the first time, tempting many people to pile into speculative trades. Wall Street keeps introducing newer and riskier ways to play the market through stock options or complex exchange-traded products that use borrowed money and compound the risk for investors….

Pennsylvania’s gambling hotline has fielded more calls tied to gambling in stocks and crypto since 2021 than it did in the prior six years combined. At a New York-based treatment center, Safe Foundation, clinical director Jessica Steinmetz estimates about 10% of patients are seeking help for addictions tied to trading. Before 2020, there were no such patients….

Addiction counselors say gambling in financial markets often goes undetected and can be tough to track because individuals confuse their actions with investing. Unlike sports betting apps such as FanDuel and DraftKings, most brokerage apps don’t post warnings about gambling or offer hotlines to seek help.

The proliferation of financial instruments, along with flashy brokerage apps that make them easy to trade, has also helped some gamblers convince themselves that they weren’t actually placing bets.

The article further points out that the high level of stock options is particularly enticing to trading junkies and that the riskiest version of options trading has exploded:

Activity in options is on track to smash another record this year. Trading in contracts expiring the same day, which are the riskiest, has soared to make up more than half of all trades in the market for S&P 500 index options this year, according to figures from SpotGamma. These trades are more electric than traditional stocks, with the potential to rocket higher or plunge to zero within minutes.

Of course, aside from being dangerous and potentially disastrous for the addicts, this activity represents a further perversion of the ostensible role of securities investment. As Keynes said:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done.