Some stocks have : cheap, volatile, and offering a small chance of an enormous payoff. They attract a particular kind of buyer. If those buyers trade on the same impulse rather than on company news, the stocks should move together more than their businesses can explain. So the study looked for excess , and then went to the actual trades to find out who was producing it.
Gamblers trading in step produce it. Lottery-like stocks comove strongly with one another, and the comovement is strongest among those located in regions where investors show stronger . Looking directly at trades, investors with a greater propensity to gamble trade lottery-like stocks more actively, and their trades are more strongly correlated. Gambling enthusiasm over time and income shocks both add a to that demand.
Lottery-like stocks are cheap, volatile and offer a remote chance of a very large gain. That payoff shape attracts investors with a taste for exactly that bet, which concentrates a particular kind of owner in a particular kind of stock.
The testable consequence is correlated trading. If these owners buy and sell on a shared impulse rather than on company-specific information, the stocks should show excess return comovement, meaning they move together more than their underlying businesses justify. This study shows that they do.
The comovement is also geographically patterned. It is strongest among lottery stocks located in regions where investors exhibit stronger gambling propensity, which ties the market pattern to the behavior rather than leaving it as an unexplained correlation.
Looking directly at investor trades closes the loop. Investors with a greater propensity to gamble trade lottery-like stocks more actively, and those trades are more strongly correlated with one another. The authors further show that time variation in general gambling enthusiasm, along with income shocks from fluctuating economic conditions, induce a systematic component in demand for these stocks. Note that the study infers gambling propensity from regional characteristics, so it observes the correlated trading while the motive stays an interpretation.
wat. Lottery-like stocks move as a block because the people who buy them are buying on the same impulse at the same time.
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It shows investor psychology creating a risk factor rather than merely a mistake. If demand for lottery stocks moves as a block, the correlation is a feature of the market, not noise in individual decisions.
How do we know?
Kumar, Page and Spalt measured excess return comovement among lottery-like stocks, compared it against regional gambling propensity, examined individual investor trades directly, and tested time variation in gambling enthusiasm and income shocks.
What is still unknown
Archival market and trading data, so gambling propensity is inferred from regional characteristics rather than measured in each investor. Correlated trading is shown; the motive behind it is an interpretation.
Learn something?
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