Opinion
Sebi’s risk warnings can draw inspiration from an anti-tobacco campaign
Summary
- Sebi’s efforts to caution retail investors dabbling with equity derivatives doesn’t seem to be working. Instead of statistics, the market regulator needs to tell stories. Perhaps the same approach could be tried as taken with tobacco addicts.
On 23 September, the Securities and Exchange Board of India (Sebi) published a study in which it said that 76.3% of loss-making traders continued trading in equity futures and options (F&O) despite incurring losses for two consecutive years.
Out of the 2.44 million investors who faced losses in both 2021-22 and 2022-23, 1.86 million continued trading in 2023-24. However, only 8.3% managed to turn a profit.
Why do loss-making traders continue trading? At an individual trader’s level, an escalation of commitment—throwing good money after bad, i.e., in the hope of making up for previous losses—seems to be at work. But there’s more to it.
In May 2023, Sebi required stock brokers to prominently display risk disclosures when investors logged into their trading accounts. They had to disclose that nine out of ten individual traders in the equity F&O segment experienced losses and that loss-making traders recorded an average net trading loss of ₹50,000.
Also read: How F&O trading became India’s favourite game: Lessons from the Soviet Union
But these disclosures didn’t seem to have had much of an impact on the F&O mania. According to Sebi’s study, 91.1% of individuals incurred net losses in F&O trading in 2023-24, compared to 91.5% in 2022-23 and 90.2% in 2021-22. At an aggregate level, individuals incurred losses of about ₹75,000 crore in 2023-24.
This indicates that Sebi’s mandate requiring stock brokers to display risk disclosures didn’t work. Further, the Sebi study found that the top 3.5% of loss-makers, approximately 400,000 traders, faced an average loss of ₹28 lakh per person.
So, why didn’t Sebi’s mandate for risk disclosures work? Now, just because there is data out there doesn’t mean people will pay attention to it, especially if it appeared each time one logged on to a trading account.
First, most people trade on smartphones, which have small screens. On these compact displays, the caution typically appears at the bottom, making it difficult to read. Second, data appearing recurrently tends to become a blind spot over time.
There was another factor at work. As Morgan Housel writes in Same As Ever: “There is too much information in the world for everyone to calmly sift through the data, looking for the most rational, most correct answer."
People want stories, not data. Or as Housel writes: “People are busy and emotional, and a good story is always more powerful and persuasive than ice-cold statistics."
Also read: Nine out of 10 individual F&O traders lost money in FY24, Sebi study reveals
As for those investing in F&O, they were led to believe that making money in this market was easy. This story- telling was carried out by financial influencers, those appearing as experts on TV and also by fund managers, stock brokers and many others in the financial services business.
The story of easy money from F&O trades was lapped up by individuals. Or as Amanda Montell writes in The Age of Magical Overthinking, though in a very different context, “They wanted a relatable populist who spoke their language, and whom they could access for free on their phones."
Financial influencers and others became these relatable populists who sold stories and not data, encouraging individual traders to trade more, even after losing money.
So, this leaves us with the question of what Sebi can do to control the F&O mania. An essay titled ‘The Life You Save May Be Your Own,’ written by economist Thomas Schelling, might be of help here. Schelling offers the example of a six-year-old girl needing thousands of dollars for a life-saving operation.
When people come to know of it, they will flood her with donations to save her. However, if you mention that without sales tax, deteriorating hospital facilities could lead to more preventable deaths, then only a few will offer help.
Using this contrast, Schelling explains the concept of an identified life and a statistical life. People who would die because of a hospital not having adequate facilities are statistical lives, while the girl who needs money is an identified life.
The world cares about identified lives and not statistical lives. As Schelling writes in the essay, thousands of “unidentified" people die due to missing mosquito nets, vaccines or clean water.
Sebi needs to differentiate between statistical lives and an identified life. Whenever it puts out aggregate data on how individuals are losing money on trading F&O, it’s talking about statistical lives. But the world cares about identified lives. And this is where Sebi can really do something.
It already has data on investors who have made big losses trading F&O. It needs to approach them and encourage them to talk about their loss experience. Perhaps financial incentives can be offered to get them to talk. These stories then need to be cut into small reels for social media. Longer videos could also be put out.
Also read: Sebi is regulating influencers. What if they’re also mutual fund distributors?
The regulator could learn from the story of Mukesh Harane. Addicted to gutka, Harane died of oral cancer in October 2009. His story became the centrepiece of an anti-tobacco campaign, with an audio-visual message that was widely broadcast.
The campaign’s graphic visuals were far more impactful in highlighting the dangers of gutka consumption than statistics because people pay far closer attention to humans telling stories than just data. Indeed, to issue effective warnings, Sebi needs to find its Mukesh Harane.
