Proceedings of 4th Global Business and Finance Research Conference
25 - 27 May 2015, Marriott Hotel, Melbourne, Australia
ISBN: 978-1-922069-76-4
Lottery Stocks and Investor Risk Preference
Alex Frino, Grace Lepone* and Danika Wright
This study aims at identifying risk-seeking behaviour in stock market and the effects on the
investors who display this bias. In particular, we analyse lottery stocks in Australia by
adopting different definitions and find lottery stocks underperform. We also study investor
behaviour using brokerage data for Australian retail investors from 1 Feb 2010 to 28 Feb
2013. Specifically, we examine investment into lottery stocks as well as risk-seeking
conditioned on performance of existing investments. Other possible determinants of riskseeking bias are also investigated. Consistent with past findings, lottery stocks represent
risk-seeking behaviour and underperform. At the portfolio level, investment in lottery stocks
results in significantly lower returns. 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 overconfidence. We also find that gender and age play a significant role in investors’ risk
preference with male investors and younger investors more likely to be risk-seeking.
Field of Research: Behavioural Finance
Keywords: Behavioural Finance, Lottery stocks, Risk, House money effect, Prospect
theory
_______________________
Prof. Alex Frino, Macquarie Graduate School of Management, 99 Talavera Road, North Ryde NSW 2113,
Australia.
Ms. Grace Lepone*, Macquarie Graduate School of Management, 99 Talavera Road, North Ryde NSW
2113, Australia, Email: ggong@cmcrc.com
Dr. Danika Wright, Business School, The University of Sydney, New South Wales 2006, Australia