Foraging under conditions of short-term exploitative competition: The case of stock traders

TL;DR

This study examines how professional stock traders make short-term foraging decisions, revealing they use heuristics aimed at short-term comparative gains, which may not align with maximizing overall income.

Contribution

It provides empirical evidence linking traders' short-term decision heuristics to their competitive environment, bridging animal foraging theory and financial trading behavior.

Findings

Traders' choices are driven by heuristics maximizing short-term comparative returns.

No consistent link between trading choices and net income.

Short-term win strategies may be maladaptive for overall market performance.

Abstract

Theory purports that animal foraging choices evolve to maximize returns, such as net energy intake. Empirical research in both human and nonhuman animals reveals that individuals often attend to the foraging choices of their competitors while making their own foraging choices. Due to the complications of gathering field data or constructing experiments, however, broad facts relating theoretically optimal and empirically realized foraging choices are only now emerging. Here, we analyze foraging choices of a cohort of professional day traders who must choose between trading the same stock multiple times in a row---patch exploitation---or switching to a different stock---patch exploration---with potentially higher returns. We measure the difference between a trader's resource intake and the competitors' expected intake within a short period of time---a difference we call short-term comparative returns. We find that traders' choices can be explained by foraging heuristics that maximize their daily short-term comparative returns. However, we find no one-best relationship between different trading choices and net income intake. This suggests that traders' choices can be short-term win oriented and, paradoxically, maybe maladaptive for absolute market returns.