You may know of people who ridicule lottery players because the odds are so great and, it would seem, they can't do simple math. But most people don't ridicule stock market investors even though the same circumstances - a lack of real knowledge and a field of competitors doing the same thing - make it less likely they will be successful unless fortune makes their decisions align with people who know what they are doing.
The riskier investors tend to act, the more socioeconomic characteristics they share with people who play state lotteries 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."
- PHYSICAL SCIENCES
- EARTH SCIENCES
- LIFE SCIENCES
- SOCIAL SCIENCES
Subscribe to the newsletter
Stay in touch with the scientific world!
Know Science And Want To Write?
- Quantum Teleportation 25 Kilometers Away
- BICEP2's vision wasn't that strong, Planck says their window was too dusty.
- 30 Years Left To Reach The Limit: CO2 Emissions Will Reach New Record High In 2014
- Graphene Sensor Tracks Down Cancer Biomarkers
- Why Natural Gas, Including Fracking, Is Better For The Environment Than Wind And Solar
- Global Carbon Report: Emissions Will Hit New Heights In 2014
- John Ellis On The Ascent Of The Standard Model
- "Sorry to say it PD, but you look very confused to me. The model has been the samesince the late..."
- "Don't believe it. Global warming due to man made activity is bunk. The science does not support it...."
- "No, I have no doubts that your Lagrangian math is sound and all of the equations balance, this..."
- "I suppose when all you can see is political bias, it stands to reason that you would interpret..."
- " Actually that's a pretty good misrepresentation of the studies. Thanks for contributing more nonsense..."
- Mothers of children with autism less likely to have taken iron supplements
- Research evaluates neurodevelomental and medical outcomes in single family room NICU
- E-cigarettes unhelpful in smoking cessation among cancer patients
- UTHealth researchers study impact of smoking ban in homeless shelter
- Teens' neural response to food commercials predicts future weight gain