Investors who 'gamble' in the stock market have same characteristics as lottery players

February 26, 2009

The socioeconomic characteristics of people who play state lotteries are similar to investors who pick stocks with a lottery quality--high risk with a small potential for high return, and just like the lottery, returns on average are lower for those who invest this way in the stock market, research from The University of Texas at Austin shows.

In the paper, "Who Gambles in the Stock Market?" Alok Kumar, assistant professor of finance at the McCombs School of Business at The University of Texas at Austin, presents evidence of this counter-productive stock-market behavior after studying the demographics and financial transactions of 70,000 anonymous investors. The research will be published in a forthcoming issue of the Journal of Finance.

"We found that people who took risks with lottery-type stock typically earned 2 to 3 percent less than other investors," Kumar said.

Kumar defines lottery-type stocks as those with a share price under $5 and a history of high volatility and extreme positive returns. These stocks are inexpensive and come with a high chance of losing, but they also offer the small potential for a big payoff.

Kumar's research found that people with household income below average for their area are more likely to buy lottery-type stocks, and that they are purchased in areas with high unemployment and during economic downturns. In addition, regions with higher concentrations of Catholics such as in Massachusetts and Rhode Island have a stronger preference for lottery-type stocks, while those in Protestant regions like areas in the South are less drawn to them—a pattern that also mirrors ticket-purchasing trends in state lotteries by the two groups.

"It is particularly important to be aware of our gambling tendencies now because the urge to gamble is greater during difficult economic times," Kumar said. "Stock market 'gambles' are unlikely to pay off, and those who are close to retirement are likely more vulnerable to this urge because they might feel they only have a short time period to recoup their losses. Unfortunately, this behavior can further worsen their situation and delay recovery."

Source: University of Texas at Austin, McCombs School of Business

Explore further: Nokia profit grows as networks division leads turnaround

Related Stories

Nokia profit grows as networks division leads turnaround

July 30, 2015

Nokia enjoyed a solid 60 percent rise in net profit in the second quarter, with a good performance in its core networks division suggesting the Finnish company is succeeding in turning its business around since selling its ...

Breeding a better peanut butter

July 30, 2015

Peanuts are big - big business that is. According to the National Peanut Board, Americans spend about $800 million a year on peanut butter, and peanuts contribute more than $4 billion a year to the US economy.

Researcher to talk at Black Hat on 'scary' area in Android

July 28, 2015

Does that cute little green robotic creature with two ear-sticks call up feelings of an open, friendly mobile operating system, aka Android? Wow, Monday stories were not about how cute and adorable is that little green creature. ...

Recommended for you

Earliest evidence of reproduction in a complex organism

August 3, 2015

Researchers led by the University of Cambridge have found the earliest example of reproduction in a complex organism. Their new study has found that some organisms known as rangeomorphs, which lived 565 million years ago, ...

Model shows how surge in wealth inequality may be reversed

July 30, 2015

(Phys.org)—For many Americans, the single biggest problem facing the country is the growing wealth inequality. Based on income tax data, wealth inequality in the US has steadily increased since the mid-1980s, with the top ...

French teen finds 560,000 year-old tooth (Update)

July 28, 2015

A 16-year-old French volunteer archaeologist has found an adult tooth dating back around 560,000 years in southwestern France, in what researchers hailed as a "major discovery" Tuesday.

1 comment

Adjust slider to filter visible comments by rank

Display comments: newest first

Hoffman147
not rated yet Feb 27, 2009
Kind of like buying Citigroup or Bank of America today. I have the feeling that the lottery could be the better long-term investment.

Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.