Abstract
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 language | English |
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| Title of host publication | World finance conference venice, July 2 - 4, 2014 e-proceedings |
| Publisher | World Finance Conference |
| Pages | 191-191 |
| Number of pages | 1 |
| ISBN (Print) | 9789899881617 |
| Publication status | Published - 2014 |
| Event | World finance conference - Venice Duration: 2 Jul 2014 → 4 Jul 2014 |
Conference
| Conference | World finance conference |
|---|---|
| City | Venice |
| Period | 2/07/14 → 4/07/14 |