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Article
Publication date: 15 June 2021

Tingting Zhang, Desheng Wei, Zhifeng Liu and Xihao Wu

This paper studies the effects of lottery preference on stock market participation at the macro level.

Abstract

Purpose

This paper studies the effects of lottery preference on stock market participation at the macro level.

Design/methodology/approach

The authors use the abnormal search volume intensity for lottery-related keywords from the Baidu search engine to capture retail investors' lottery preference. To measure stock market participation, they use five different macro-level measures from various angles. They perform the time series regression analysis in their empirical study.

Findings

First, the validation tests show that the lottery preference index in this study is reasonable. Further, the authors find that lottery preference increases people's propensity to enter and trade in the stock market. Besides, they find that the effect on trading behavior is asymmetric, that is, high lottery preference has a more significant impact on trading behavior than low lottery preference. However, lottery preference has no significant effect on the stockholding.

Originality/value

This paper contributes to the growing literature that examines the determinants of stock market participation and the role of lottery/gambling preference in the financial market. It also provides direct and novel evidence for Statman's (2002) conclusions about the similarity of lottery players and stock traders.

Details

China Finance Review International, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 2044-1398

Keywords

Article
Publication date: 2 September 2014

John R. Nofsinger and Abhishek Varma

The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin…

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Abstract

Purpose

The purpose of this paper is to explore some commonly held beliefs about individuals investing in over-the-counter (OTC) stocks (those traded on Over-the-counter Bulletin Board (OTCBB) and Pink Sheets), a fairly pervasive activity. The authors frame the analysis within the context of direct gambling, aspirational preferences in behavioral portfolios, and private information.

Design/methodology/approach

Contrary to popular perceptions, the modeling of the deliberate act of buying OTC stocks at a discount brokerage house finds that unlike the typical lottery buyers/gamblers, OTC investors are older, wealthier, more experienced at investing, and display greater portfolio diversification than their non-OTC investing counterparts.

Findings

Behavioral portfolio investors (Shefrin and Statman, 2000) invest their money in layers, each of which corresponds to an aspiration or goal. Consistent with sensation seeking and aspirations in behavioral portfolios, OTC investors also display higher trading activity. Penny stocks seem to have different characteristics and trading behavior than other OTC stocks priced over one dollar. Irrespective of the price of OTC stocks, the authors find little evidence of information content in OTC trades.

Originality/value

The paper provides insight into individual investor decision making by empirically exploring the demographic and portfolio characteristics of individuals trading in OTC stocks.

Details

Review of Behavioral Finance, vol. 6 no. 1
Type: Research Article
ISSN: 1940-5979

Keywords

Book part
Publication date: 3 June 2008

James C. Cox and Vjollca Sadiraj

Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a…

Abstract

Much of the literature on theories of decision making under risk has emphasized differences between theories. One enduring theme has been the attempt to develop a distinction between “normative” and “descriptive” theories of choice. Bernoulli (1738) introduced log utility because expected value theory was alleged to have descriptively incorrect predictions for behavior in St. Petersburg games. Much later, Kahneman and Tversky (1979) introduced prospect theory because of the alleged descriptive failure of expected utility (EU) theory (von Neumann & Morgenstern, 1947).

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

Article
Publication date: 18 August 2020

Jordan Moore

This paper proposes and models stock loan lotteries, a financial innovation that improves individual investor welfare. Stock loan lotteries are prize-linked payoffs using…

Abstract

Purpose

This paper proposes and models stock loan lotteries, a financial innovation that improves individual investor welfare. Stock loan lotteries are prize-linked payoffs using securities lending fees.

Design/methodology/approach

This paper solves an existing theoretical model for an investor's utility-maximizing choices with and without stock loan lotteries and compares outcomes.

Findings

Stock loan lotteries motivate prospect theory investors to buy and hold risky assets with high expected returns. Stock loan lotteries improve welfare more for poor investors and improve welfare more in a model with market frictions such as trading costs.

Social implications

Stock loan lotteries increase household savings, leading to greater financial wealth and security in retirement.

Originality/value

This paper proposes a new financial product that improves financial outcomes for individual investors.

Article
Publication date: 11 March 2021

Bei Chen and Quan Gan

This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.

Abstract

Purpose

This paper investigates how the gambling measure captures market bubble events, and how it predicts stock return and option return.

Design/methodology/approach

This paper proposes a gambling activity measure by jointly considering open interest and moneyness of out-of-the-money (OTM) individual equity call options.

Findings

The new measure, CallMoney, captures excessive optimism during the dot-com bubble, the oil price bubble and the pre-GFC stock market bubble. CallMoney robustly and negatively predicts both OTM and at-the-money call option returns cross-sectionally. The option return predictability of CallMoney is stronger when stock price is further from its 52-weeks high, capital gains overhang is lower, and when information uncertainty of the underlying stock is higher. CallMoney also robustly and negatively predicts cross-sectional stock returns.

Originality/value

The gambling measure has the advantages of being economically intuitive, model-free, easy to measure. The measure performs more robustly than existing lottery measures with respect to option and stock return predictability and more reliably captures the overpricing of options and stocks. The work helps understanding the gambling related anomalies in equity option returns and stock returns.

Details

Review of Behavioral Finance, vol. 14 no. 3
Type: Research Article
ISSN: 1940-5979

Keywords

Article
Publication date: 19 June 2020

Wing-Keung Wong

This paper aims to give a brief review on behavioral economics and behavioral finance and discusses some of the previous research on agents' utility functions, applicable…

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Abstract

Purpose

This paper aims to give a brief review on behavioral economics and behavioral finance and discusses some of the previous research on agents' utility functions, applicable risk measures, diversification strategies and portfolio optimization.

Design/methodology/approach

The authors also cover related disciplines such as trading rules, contagion and various econometric aspects.

Findings

While scholars could first develop theoretical models in behavioral economics and behavioral finance, they subsequently may develop corresponding statistical and econometric models, this finally includes simulation studies to examine whether the estimators or statistics have good power and size. This all helps us to better understand financial and economic decision-making from a descriptive standpoint.

Originality/value

The research paper is original.

Details

Studies in Economics and Finance, vol. 37 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Book part
Publication date: 3 June 2008

Nathaniel T. Wilcox

Choice under risk has a large stochastic (unpredictable) component. This chapter examines five stochastic models for binary discrete choice under risk and how they combine…

Abstract

Choice under risk has a large stochastic (unpredictable) component. This chapter examines five stochastic models for binary discrete choice under risk and how they combine with “structural” theories of choice under risk. Stochastic models are substantive theoretical hypotheses that are frequently testable in and of themselves, and also identifying restrictions for hypothesis tests, estimation and prediction. Econometric comparisons suggest that for the purpose of prediction (as opposed to explanation), choices of stochastic models may be far more consequential than choices of structures such as expected utility or rank-dependent utility.

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

Book part
Publication date: 3 June 2008

Glenn W. Harrison and E. Elisabet Rutström

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the…

Abstract

We review the experimental evidence on risk aversion in controlled laboratory settings. We review the strengths and weaknesses of alternative elicitation procedures, the strengths and weaknesses of alternative estimation procedures, and finally the effect of controlling for risk attitudes on inferences in experiments.

Details

Risk Aversion in Experiments
Type: Book
ISBN: 978-1-84950-547-5

Book part
Publication date: 7 July 2006

Andreas Lange, John A. List, Michael K. Price and Shannon M. Price

Charitable lotteries represent one of today's most popular fund-raising schemes. This study begins by developing theory examining the optimal design of a charitable lottery

Abstract

Charitable lotteries represent one of today's most popular fund-raising schemes. This study begins by developing theory examining the optimal design of a charitable lottery. We show that any prize distribution is only optimal for a group of n symmetric agents with given risk preference. However, there exist multiple prize distributions that generate contributions approaching the optimal level over a range of individual risk posture. We test our theory using a battery of experimental treatments. Our results suggest that lotteries dominate the voluntary contribution mechanism (VCM) in terms of total dollars raised. Moreover, the performance of lotteries weakly depends on individual risk preference.

Details

Experiments Investigating Fundraising and Charitable Contributors
Type: Book
ISBN: 978-0-76231-301-3

Book part
Publication date: 15 October 2008

Liema Davidovitz

Purpose: The purpose of this paper is to investigate whether inequality aversion is influenced by the risk level. Recently empirical evidence points to deviations from…

Abstract

Purpose: The purpose of this paper is to investigate whether inequality aversion is influenced by the risk level. Recently empirical evidence points to deviations from selfish behavior of Homo economicus. Thus, people are not motivated solely by their own monetary payoffs, but are also concerned about issues of equality and fairness. This paper distinguishes between inequality aversion and risk aversion and discusses whether the level of risk affects these motivations.

Design: In an experimental framework the attitude toward inequality is separated from the attitude toward risk. A risky environment is generated by a set of lotteries. The subjects had to determine the method for payment, equally (CG) or nonequally (IG), for three lotteries with different levels of risk. The inequality preferences are measured by the level of the selected probability for CG.

Findings: The main finding of this paper is that preferences for inequality are influenced by level of risk. We found that aversion to inequality was stronger when the level of risk was higher. In the low and medium risk lotteries participants preferred the individual gamble – the nonegalitarian method. Only in the high-risk lottery the participants preferred the common gamble that assured them equal payments.

Originality/value: The paper distinguishes between inequality aversion and risk aversion and subjects are allowed to trade one off against the other. Thus, it contributes to the understanding of the interrelationship between income inequality and risk.

Details

Inequality and Opportunity: Papers from the Second ECINEQ Society Meeting
Type: Book
ISBN: 978-1-84855-135-0

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