The pitfalls of night trading

Trading while sleepy? Circadian mismatch and excess volatility in a global experimental asset market, found that night traders were more likely to engage in risky behaviour such as buying shares at inflated prices and holding on to them for longer, than day traders.

The researchers, Professor Ananish Chaudhuri and Dr Ryan Greenaway-McGrevy, both from the Department of Economics at the University of Auckland Business School, and Professor David Dickinson, Economics Department, Appalachian State University, recruited university students in the US east-coast and New Zealand and invited them to take part in a stock-trading game.

Each participant has cash and shares to trade. Cash earned interest and the shares had a fundamental value of US $7 (NZ $10.50), meaning that any shares held at the end of the session could be redeemed for that amount. Participants could buy or sell shares for 30 rounds. The objective of the traders was to earn the most money. They were then recruited for different time slots during the day: 4am, 8am, 12 noon, 4pm, 8pm and 12 midnight. The researchers set up two types of markets: “local” markets, involving people in the same location and therefore, playing at the same time of day and “global” markets involving people at both locations, playing at different times of the day.

For the “global” markets, the different time-slots and the 16-hour time difference between the two locations had one group taking part in a “good” time of the day, when they are alert and awake while the other group is at a “bad” time, when they are more likely to be sleepy.

The results indicated that night traders were more likely to be ‘tired’, causing cognitive impairment and impacting on their performance. They were more prone to taking risks that were normally avoided. In comparison, day traders were found to be more rested and alert. On average, tired traders earned around a third less than the alert traders in markets that had a combination of both.

The researchers also found that “global” markets, that involved players at different times of day were particularly susceptible to “bubbles”, or assets selling at inflated values. In some markets the share prices, with a fundamental value of US $7 reached as high as US $80!

Equally importantly, the study showed that “tired” traders, playing at a bad time of day made systematic mistakes. This allowed the more alert traders to take advantage of the tired traders, who ended up earning less.

The results imply that as markets become more globalized with traders geographically dispersed in real time, the disparities in favourable outcomes between night and day trading will increase.

What if people were playing for millions of dollars rather than the smaller sums in this study? Evidence in the paper suggests that if the markets are flooded with more cash, then the bubbles would be much bigger and the losses for the tired traders much larger.

Dickinson, D., Chaudhuri, A and Greenaway-McGrevy, R. (2019). Trading while sleepy? Circadian mismatch and excess volatility in a global experimental asset market. Experimental Economics. 23, 526-553, June 2020.