Who Gambles in the Stock Market?



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    • Alok Kumar is at the McCombs School of Business, University of Texas at Austin. I would like to thank two anonymous referees; an anonymous associate editor; Lucy Ackert; Warren Bailey; Brad Barber; Nick Barberis; Robert Battalio; Garrick Blalock; Markus Brunnermeier; Sudheer Chava; Vidhi Chhaochharia; Lauren Cohen; Shane Corwin; Josh Coval; Henrik Cronqvist; Steve Figlewski; Margaret Forster; Amit Goyal; Bing Han; Cam Harvey (the editor); David Hirshleifer; Scott Irwin; Narasimhan Jegadeesh; Danling Jiang; George Korniotis; Lisa Kramer; Charles Lee; Chris Malloy; Bill McDonald; Victor McGee; Stefan Nagel; Terrance Odean; Jerry Parwada; Allen Poteshman; Stefan Ruenzi; Kevin Scanlon; Paul Schultz; Mark Seasholes; Devin Shanthikumar; Bob Shiller; Sophie Shive; Kent Womack; Jeff Wurgler; Wei Xiong; Lei Yu; Eduardo Zambrano; Ning Zhu; and seminar participants at the Spring 2005 NBER Behavioral Finance Group Meeting, University of Notre Dame, 2005 EFA Meeting, 2006 AFA Meeting, Ohio State University, University of Texas at Austin, University of California at Los Angeles, Tuck School at Dartmouth, Columbia University, and University of North Carolina at Chapel Hill for helpful discussions and valuable comments. In addition, I would like to thank Nick Crain, Jeremy Page, and Margaret Zhu for excellent research assistance; Itamar Simonson for making the investor data available to me; Brad Barber and Terrance Odean for answering numerous questions about the investor database; and Garrick Blalock for providing the state lottery expenditure data. I am grateful to Thomson Financial for access to its Institutional Brokers Estimate System (I/B/E/S), provided as part of a broad academic program to encourage earnings expectations research. Of course, I am responsible for all remaining errors and omissions.


This study shows that the propensity to gamble and investment decisions are correlated. At the aggregate level, individual investors prefer stocks with lottery features, and like lottery demand, the demand for lottery-type stocks increases during economic downturns. In the cross-section, socioeconomic factors that induce greater expenditure in lotteries are associated with greater investment in lottery-type stocks. Further, lottery investment levels are higher in regions with favorable lottery environments. Because lottery-type stocks underperform, gambling-related underperformance is greater among low-income investors who excessively overweight lottery-type stocks. These results indicate that state lotteries and lottery-type stocks attract very similar socioeconomic clienteles.