Investor behaviour and lottery stocks

Grace Lepone, Danika Wright

Research output: Chapter in Book/Report/Conference proceedingOther chapter contribution


Two theories currently exist to predict investor behaviour conditioned on past investment performance. Under prospect theory, investors are risk averse following gains and risk seeking following losses. The 'house-money' effect, on the other hand, predicts investors are more risk-seeking following gains. This study analyses investor behavior using brokerage data for Australian retail investors from 1 Feb 2010 to 28 Feb 2013. Specifically, we examine investment into and performance of lottery stocks as well as risk-seeking conditioned on performance of existing investments. Consistent with past findings, lottery stocks are shown to offer inferior returns and represent risk-seeking behaviour. At the portfolio level, investment in lottery stocks results in significant underperformance. This result is not biased by portfolio size or diversification, which has implications for behavioural finance research and portfolio management. Our results indicate investors are more likely to invest in lottery stocks following past portfolio gains, supporting the house-money effect. This result is robust over various holding periods and alternative behavioural explanations as such as over-confidence.
Original languageEnglish
Title of host publicationWorld finance conference venice, July 2 - 4, 2014 e-proceedings
PublisherWorld Finance Conference
Number of pages1
ISBN (Print)9789899881617
Publication statusPublished - 2014
EventWorld finance conference - Venice
Duration: 2 Jul 20144 Jul 2014


ConferenceWorld finance conference

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