Do Real-Time Stock Quotes Make Us Feel Poor?

In 1940, Fred Schwed could plausibly claim that “Wall Street” consisted of about ten thousand people. Now Goldman Sachs alone employs four times as many. Economists have struggled to explain the growth of the financial sector, especially in the US economy. The numbers are stark: finance was around 2% of GDP in the mid-40′s. It’s about 8% now. The last time it got near 6% was just ahead of the crash. There are two main explanations:

1. Liberals tend to think that the financial markets have grown due to pro-wealthy-people deregulation and legislation. If banks can do (read: “Get away with”) more, they’ll crowd out other parts of the economy. And ambitious, unscrupulous people will all rush to whatever field has the easiest money. (A more sympathetic view might be that, of all the ways you can cheat someone, sharp stock trading is among the nicest. Plenty of people believe in the efficient market theory—who’s to say their reasoning was worse than yours when they bought at the wrong price while you sold at the right one?)
2. Conservatives tend to argue that finance should be growing faster than the rest of the economy. Finance is an knowledge profession—maybe the purest of them—and economic growth should come from that kind of job. We don’t need to manufacture more stuff to the exclusion of distribution.

Both arguments have their strengths. It’s hard to imagine anything resembling the current financial system under, say, Carter-era regulations. But even under those regulations, one would expect the economy to produce more jobs for VC associates than, say, machine tool operators.

But there’s another possibility: what if the growth of the financial industry comes from palliative reactions to the pain of real-time market data? There are two sides to this argument:

1. People dislike losses more than they like gains. Someone who loses $50 has to make about $100 to feel even about it.
2. The more often you measure price movements, the more random they will be—generation to generation, basically everything goes up;from one trade to the next, it’s basically 50/50.

Put those together, and showing people more stock quotes is a recipe for making them miserable. Consider a very illiquid stock that trades for about $10 per share. Let’s say it trades eleven times in one day—six buys and five sells. Every buy bumps it up $.10, every sell knocks it down by that amount.

Someone who buys the stock and checks it daily makes 1%. They’re happy with that (hopefully). Someone who buys the stock and tracks every trade makes the same amount. But since losses count about twice as strongly as gains, it’s as if they’d lost $.40, not gained $.10.

Multiply this by lots of stocks, lots of traders, and increasing volume. Then factor in the increasingrandomness of prices, in the sense that any discernable trend will be arbitraged away by quants. Pay close enough attention, and the stress from intraday losses will be cumulatively equivalent to the stress of a major crash.

Where does the growth of the financial sector factor into this? People pay money to solve problems that pain them. If the stock market is making them unhappy, they can churn into mutual funds or options or forex brokers or whatever else.

This doesn’t explain the entire trend towards financialization, but it’s probably a component: when you have better information, you’re more aware of how often you’re losing money. And the average investor will pay massive transaction fees rather than refusing to check on their portfolio more than once a week.

(One demographic to whom this doesn’t apply: traders. The Internet has created a golden age for day traders, swing traders, algorithmic market makers, and all sorts of fascinating characters in between. But all traders admit that it’s not a full-time job for most people, and responsible traders add that it’s a dangerous part-time job for anyone.)