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.

This study shows that shifts in political climate influence stock prices. As the party in power changes, there are systematic changes in the industry-level composition of investor portfolios, which weaken arbitrage forces and generate predictable patterns in industry returns. A trading strategy that attempts to exploit demand-based return predictability generates an annualized risk-adjusted performance of 6% during the 1939 to 2011 period. This evidence of predictability spans 17%–27% of the market and is stronger during periods of political transition. Our demand-based predictability pattern is distinct from cash flow-based predictability identified in the recent literature.

[We investigate whether the adverse effects of investors' behavioral biases extend beyond the domain of financial markets to the broad macro-economy. Focusing on the income risk-sharing role of financial markets, we find that risk sharing is higher (more than double) in U.S. states where investors are more sophisticated and exhibit weaker behavioral biases. The potential for risk sharing varies geographically, but states with better risk-sharing opportunities are able to achieve higher levels of risk sharing only when investors in those states are more sophisticated. Collectively, these results indicate that investors' aggregate behavioral biases and their lack of financial sophistication adversely affect the local macro-economy.]

ABSTRACT This paper investigates whether there are systematic differences between the forecasting style and abilities of female and male analysts, and whether market participants recognize these differences. My key conjecture is that only female analysts with superior forecasting abilities enter the profession due to a perception of discrimination in the analyst labor market. Consistent with this conjecture, I find that female analysts issue bolder and more accurate forecasts and their accuracy is higher in market segments in which their concentration is lower. Further, the stock market participants are aware of the male–female skill differences. They respond more strongly to the forecast revisions by female analysts even though those analysts get less media coverage. The short‐term market reaction is incomplete, however, because it is followed by a strong post‐revision drift. The perception of abilities is similar in the analyst labor market, where female analysts are more likely to move up to high‐status brokerage firms, while their downward career mobility is lower. Collectively, these results indicate that female analysts have better‐than‐average skill due to self‐selection and market participants are at least partially able to recognize their superior abilities.

Abstract This paper uses investor-level data to provide direct evidence for an intuitive but surprisingly untested proposition that investors make larger investment mistakes when valuation uncertainty is higher and stocks are more difficult to value. Using multiple measures of valuation uncertainty and multiple behavioral bias proxies, I show that individual investors exhibit stronger behavioral biases when stocks are harder to value and when market-level uncertainty is higher. I also find that informed trading intensity is higher among stocks where individual investors exhibit stronger behavioral biases. Collectively, these results indicate that uncertainty at both stock and market levels amplifies individual investors’ behavioral biases and that relatively better informed investors attempt to exploit those biases.

Abstract This study shows that individual investors systematically shift their preferences across extreme style portfolios (small vs. large, value vs. growth). These preference shifts are influenced by past style returns and earnings differentials, and advice from investment newsletters, but are unaffected by innovations in macroeconomic variables or shifts in expectations about future cash flows. Furthermore, investors’ dynamic style preferences influence returns along multiple dimensions: i) the contemporaneous relation between style returns and style-level preference shifts is strong, ii) there is weak evidence of style return predictability, and iii) the correlations among stocks within a style increase when investors move into or out of the style with greater intensity. Overall, the results indicate that stock categorization influences investors’ portfolio decisions and stock returns.

We develop a 10-K-based multidimensional measure of firm locations. Using this measure, we show that firm-level information is geographically distributed and institutional investors are able to exploit the resulting information asymmetry. Specifically, institutional investors overweigh firms whose 10-K frequently mentions the investors' state even when those firms are not headquartered locally and earn superior returns on those stocks. These ownership and performance patterns are stronger among hard-to-value firms. Local investor performance increases with the degree of local bias and with the local economic exposure of portfolio firms. Overall, geographical variation in firm-level information generates economically significant location-based information asymmetry.

Abstract This study shows that U.S. individual investors hold under-diversified portfolios, where the level of under-diversification is greater among younger, low-income, less-educated, and less-sophisticated investors. The level of under-diversification is also correlated with investment choices that are consistent with over-confidence, trend-following behavior, and local bias. Furthermore, investors who over-weight stocks with higher volatility and higher skewness are less diversified. In contrast, there is little evidence that portfolio size or transaction costs constrains diversification. Under-diversification is costly to most investors, but a small subset of investors under-diversify because of superior information.

ABSTRACT 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.

We show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles more likely to be suspicious of foreigners. Foreign-named managers experience lower appreciation (greater decline) in flows following good (bad) performance. Following 9/11, flows to funds with managers with Middle-Eastern-sounding names declined abnormally. In an experimental setting in which skill differences are absent, individuals allocate 11% less money to an index fund managed by a foreign-named manager. This gap widens following the Boston marathon bombings.