Financial markets full of gamblers placing clueless bets put entire economies at risk

While many business leaders recognize the build-up, they may not fully appreciate its scale and consequences. The risks are not limited to financial markets; rampant speculation threatens the stability of household finances and ultimately of the broader economy.

Risk-taking is set to intensify. Digital platforms and mobile apps have made trading effortless, drawing in a surge of new retail participants. More recently, US President Donald Trump signed an executive order allowing 401(k) pension plans to invest in alternative assets such as private equity, private debt, infrastructure, real estate, commodities and cryptocurrencies.

Traditionally reserved for professional investors, these assets are typically illiquid and carry risks that most retail traders are simply not equipped to manage.

Compounding the problem, US baby boomers are projected to pass an estimated $124 trillion on to younger generations by 2048. This wealth transfer is already empowering a cohort of retail investors with a strong appetite for equities, cryptocurrencies and meme stocks and coins, as well as for sports betting and prediction markets.

At the same time, the new generation of retail traders has unprecedented access to markets and the tools to trade in highly complex derivatives like zero-day options.

Once primarily used to hedge financial exposure or take longer-term positions, such high-risk instruments are now increasingly used for intraday bets on stock-price movements by investors seeking quick returns. Many of these trades are driven not by fundamentals, but by rumours and narratives on social media.

Worse still, some traders are magnifying risky wagers through leverage, borrowing money to buy more volatile assets. Others are borrowing to purchase already leveraged products, most notably triple-leveraged Nasdaq exchange-traded funds like TQQQ (triple long) and SQQQ (triple short). These funds are characterized by extremely short holding periods: five days for TQQQ and only two for SQQQ.

The speculative mindset extends to individual stocks. Shares of companies like Robinhood and Coinbase have average holding periods of less than a month, indicating that many investors are speculating on short-term price movements rather than assessing how these businesses will perform over time.

Beyond individual portfolios, this speculative behaviour, which ignores the fundamentals and financial metrics (such as price-earning ratios) that have long guided investment decisions, contributes to the already opaque and largely unmeasured leverage in the shadow banking system. As a result, debt-fuelled trades inflate systemic risks, raising the likelihood of non-performing loans and defaults that could spill over into the real economy.

For business leaders as well as policymakers, the emergence of this speculative culture creates two problems. Most immediately, combined with rising leverage, it introduces new systemic risks. Losses from risky bets could ripple through the financial system, much like the collapse of the US mortgage market did in 2008, destabilizing the global economy. In the worst-case scenario, short-term private gains could turn into taxpayer-funded losses again.

The second problem implicates the long-term health of the real economy. As John Maynard Keynes observed nearly a century ago, excessive speculation distorts economic development by diverting resources away from productive investment. Capital that might otherwise support breakthroughs in healthcare, infrastructure and other sectors is siphoned off into short-term trading and financial gamesmanship.

Unless speculative trading is reined in, it will hollow out the market architecture and financial plumbing that channel capital into productive enterprises and make it harder to cultivate a new generation of long-term retail investors. Capital markets that once financed businesses and drove sustainable economic growth will serve as playgrounds for short-term gamblers.

The erosion of ‘patient’ capital will weaken the stable investor base on which businesses have historically relied. While the termites of speculation are already at work within the financial system, the most urgent questions remain unasked. Is the stage being set for another global crisis? And just how much erosion can the foundations of an economy withstand? ©2025/Project Syndicate

The author is an international economist and the author of ‘Edge of Chaos: Why Democracy Is Failing to Deliver Economic Growth – and How to Fix It’