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.

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.

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.