Position-sizing Effects on Trader Performance: An experimental analysis

Non-academic literature on stock and futures trading emphasizes the importance of “money management”, here defined as "how much of available capital is to be allocated in a specific market position", also called position size. The effect of position size was experimentally studied by letting two groups trade fictitious capital through a series of trades, with only one variable available for manipulation by the participants, that is, how much of available capital to be put at risk in each and every trade. The treatment group had received a three-hour lecture in position sizing, risk management, and psychological biases, whereas the control group did not. The results showed that participants in the treatment group lost all their money to a lesser extent (p < .01) than those in the control group. However, the treatment group did not gain significantly higher profits than the control group. Traders being able to gain money over the long run were taking smaller positions than losing and bankrupt traders were (p < .0001). By receiving a theoretical education, without any practical training, the risk for a trader of going bankrupt when trading simulated stocks was decreased to a tenth. 1 This study was made feasible by financial contribution from Nordea Markets, Copenhagen, Denmark and BörsInsikt AB, Stockholm, Sweden, making it possible to pay the remuneration of the participants. They have shown great courage by supporting a study in behavioral finance, by a graduate student of psychology.