Is Speculative Trading a rational decision?

Is Speculative Trading a rational decision? We can use a payoff matrix to put some light into this question. You can also read the first analysis by decision theory of Blaise Pascal.

In our example we use this in the realm of trading. So the question here is what is the payoff of the decision to be a trader or not to be a speculative trader.

However here I make a little change, it is a strange change but I allow myself to make it. The change is that I use not a symetrical probability but asymetrical because we all know that most of the retail traders fail, and that is known to everybody. Everybody on the net talks about that, ot goes from 90 % to 99 % percent even at Zero hedge they claim 100 % depending on the time horizon.

So we have a an asymetric and probabilistic payoff matrix here.

The columns represent the probability to succeed as a trader

The lines represent the decision to trade or not to trade

And we can analyse the payoff. I use colours even if it is better to use numbers.

So let see Cell No 1: Blue colour

In this cell we have decided to be a speculative trader and we do succeed. This is the dream of everybody. To make the decision to be a trader and to succeed.

However this is a very small cell because the probability is against you.

Cell No 2: Orange colour

In this cell we have decided to be a speculative trader and you do succeed. Eveybody thinks that this won't happen to him but there are most of the traders.

This is a big cell, there is a bigger probability to fall into this cell no matter how much you try, no matter how much you work, no matter how much sphisticated instruments and back tests you do.

Cell No 3: Orange colour

In this cell we have decided NOT to be a speculative trader and we would succeed if we have decided to trade. We loose a possibility of gain. And that is bad for us.

Cell No 4: Blue colour

In this cell we have decided NOT to be a speculative trader and we would loose if we have decided to be a trader. So that was a good decision that is why we colour in blue.

So after we plotted the decisions let analyse them.

Intuitively you would see that in the lines with the decision not to trade there is more blue colour and the line with the decision to become a trader there is red colour.

So the decision not to become a professional trader has a bigger payoff than the deicion to be a trader.

Interesting and the rational choice is not to become a trader because this decision has a bigger payoff. What do you think about it?

I can ask some speculative questions? Imagine that the speculative traders should be irrational because of their choice to become a trader would you expect them to make rational choices once they are traders. And as the economic theory is based on the rational choice would you expect our friends the traders to make rational speculative decisions.