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

Feb 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: Engineers develop gift guide for parents

add to favorites email to friend print save as pdf

Related Stories

Apple, Xiaomi trade smartphone barbs in China

Nov 20, 2014

Top executives from US technology giant Apple and Chinese smartphone upstart Xiaomi traded light-hearted barbs on Thursday at a Chinese Internet conference, acknowledging the fierce competition between the ...

Top China official urges stronger Internet management

Nov 19, 2014

A top Beijing official called for stronger management of the Internet Wednesday at a government-organised conference condemned by rights campaigners as a Chinese attempt to promote its online controls globally.

Ethnic diversity reduces risk of market bubbles

Nov 18, 2014

If they consider it at all, investors likely regard ethnic diversity as a matter of social policy. But new research by an MIT Sloan professor suggests a much more practical reason to consider diversity: compared ...

Halliburton buying Baker Hughes in $34.6B deal

Nov 17, 2014

In a deal that shows just how quickly falling prices can upend the energy industry, Halliburton is buying rival oilfield services company Baker Hughes in a cash-and-stock deal worth $34.6 billion.

20% hike in annual catch agreed for bluefin tuna

Nov 17, 2014

Fishing nations agreed Monday to a 20-percent annual increase over three years in quotas of bluefin tuna caught in the Mediterranean and East Atlantic, environmental groups said.

Recommended for you

Engineers develop gift guide for parents

Nov 21, 2014

Faculty and staff in Purdue University's College of Engineering have come up with a holiday gift guide that can help engage children in engineering concepts.

Former Brown dean whose group won Nobel Prize dies

Nov 20, 2014

David Greer, a doctor who co-founded a group that won the 1985 Nobel Peace Prize for working to prevent nuclear war and who helped transform the medical school at Brown University, has died. He was 89.

User comments : 1

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.