(1952) conjectures that some investors might prefer to \take large chances of a small loss
for a small chance of a large gain.” Barberis and Huang (2008)posit that investors might
overweight low probability events and exhibit a preferencefor stocks with positive skewness.
In spite of its intuitive appeal, it has been dicult to gather direct evidence of gambling-
motivated investment decisions for at least two reasons. First, people’s gambling preferences
and portfolio decisions are not directly observed. Second,a precise and well-established
denition of stocks that might be perceived as instruments for gambling does not exist.
In this paper, I use individual investors’ socioeconomic characteristics to infer their gam-
bling preferences and attempt to detect traces of gambling in their stock investment de-
cisions. Specically, I conjecture that people’s gamblingpropensity, as reected by their
socioeconomic characteristics, predicts gambling behavior in other settings, including the
stock market. This conjecture is motivated by recent research in behavioral economics that
demonstrates that people’s risk-taking propensity in one setting predicts risky behavior in
other settings (e.g., Barsky, Juster, Kimball, and Shapiro(1997)).
I consider the most common form of gambling (state lotteries), where the identities of
gamblers can be identied with greater ease and precision, and identify the salient socioe-
conomic characteristics of people who exhibit a strong propensity to play state lotteries.
The extant evidence from lottery studies indicates that theheaviest lottery players are poor,
young, and relatively less educated, single men, who live inurban areas and belong to spe-
cic minority (African-American and Hispanic) and religious (Catholic) groups. Therefore,
a direct implication of my main conjecture is that investorswith these specic characteristics
also invest disproportionately more in stocks with lotteryfeatures.
To formally dene lottery-type stocks, I examine the salient features of state lotteries and
also seek guidance from recent theoretical studies that attempt to characterize lottery-type
stocks. Lottery tickets have very low prices relative to thehighest potential payo (i.e., the
size of the jackpot), they have low negative expected returns, their payos are very risky
(i.e., the prize distribution has extremely high variance), and, most importantly, they have
an extremely small probability of a huge reward (i.e., they have positively skewed payos).
In sum, for a very low cost, lottery tickets oer a tiny probability of a huge reward and a
large probability of a small loss, where the probabilities of winning and losing are xed and
known in advance.
While any specic stock is unlikely to possess the extreme characteristics of state lot-
teries, particularly the huge reward to cost ratio, some stocks might share these features
qualitatively. To identify those stocks that could be perceived as lotteries, I consider three
characteristics: (i) stock-specic or idiosyncratic volatility, (ii) stock-specic or idiosyncratic
skewness, and (iii) stock price.
As with lotteries, if investors are searching for \cheap bets,” they are likely to nd low-
priced stocks attractive. Within the set of low-priced stocks, they are likely to nd stocks
with high stock-specic skewness more attractive. And among the set of stocks that have low
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