21 Feb 2023

Lottery stocks: A gambling proxy for the affluent

Study at Leibniz Institute SAFE shows that particularly wealthy and educated people gamble on speculative financial stocks for quick cash and thrills, while less wealthy and educated people rather opt for online bets

A study at the Leibniz Institute for Financial Research SAFE has investigated whether people who enjoy gambling outside of the stock market also engage in speculative trading within it. While the results presented in SAFE Working Paper No. 373 show that this type of behavior evokes the same thrill on and off the stock market, online bettors and risk traders on the stock market differ in their level of education and wealth. Since gambling, unlike stock trading, can be expected to generate losses on average and in the long run, the paper also identifies a channel for how pre-existing wealth inequalities between social groups can increase over time.

“People who participate in sports betting, lotteries and casino games are less likely to pursue their penchant for gambling on the stock market. After all, stocks that promise large profits but, more importantly, may generate large losses are predominantly included in the portfolios of people who do not engage in gambling or sports betting”, illustrates Andreas Hackethal, one of the authors of the paper, who researches, inter alia, the financial decisions of private households at the Leibniz Institute SAFE and the Goethe University Frankfurt. Previous studies had painted a different picture. Therefore, objective, individual data are crucial to understand why private investors trade in financial instruments.

Emily Kormanyos, Andreas Hackethal, both of SAFE and Goethe University Frankfurt, and Tobin Hanspal of WU Vienna University of Economics and Business, studied the data of several thousand bank customers and analyzed their transactions involving online betting portals and lottery stocks. “People who gamble accept above-average risks on the stock market. However, they buy significantly fewer lottery stocks and meme stocks and thus speculate less than risk traders who do not gamble”, concludes Kormanyos, who works as a research assistant at the Chair of Personal Finance at the Goethe University Frankfurt.

Active traders are taking a risk with lottery shares

Lottery stocks are characterized by low prices and asymmetric risk. Thus, similar to lotteries, large profits can be made in the short term, but a negative return is much more likely in the long run. The study found such shares can primarily be found in the portfolios of people who are highly active on the stock market, are wealthy and have solid financial knowledge - and for whom no transactions with online betting portals could be observed. “While these frequent traders take high risks with lottery stocks, they do not put all their eggs in one basket, but rather invest the rest of their portfolio wisely. Ultimately, the expected return on investment is actually positive”, says Hanspal, Assistant Professor of Finance at WU Vienna University of Economics and Business.

The research team observed more than 12,000 customers who had made transactions with online betting portals and held securities accounts. Although this group invested less in lottery stocks, they were more likely to make typical investment mistakes which can be traced back to insufficient levels of diversification and resulted in below-average expected returns. The behavior of online bettors in securities markets is similar to that of investors with little financial knowledge.

These findings advance research on individual motives for investing and are important considering current trends: Easier access to stock markets via trading apps or the ability to influence price developments via social networks do not seem to fuel stock market "gambling" of inexperienced traders. Rather, wealthier, and more experienced investors use lottery stocks for the same thrill that gamblers have long found in online betting or at the casino table.

Download SAFE Working Paper No. 373

SAFE Working Paper No. 373 has been covered in an article of the Frankfurter Allgemeine Sonntagszeitung: "Das große Zocken".

Scientific Contact

Prof. Dr. Andreas Hackethal

Coordinator Pension Finance Lab