The Lottery Mindset: Investors, Gambling and the Stock Market

1. A Survey of Behavioral Finance 1.1 The Behavioral Finance Paradigm 1.2 Investor Preferences 1.2.1 Mental Accounting 1.2.2 Preference for Concentrated Portfolios 1.2.3 Preference for the Familiar 1.2.4 Preference for Lottery-Type Stocks 1.2.4 Preference for Active Trading 1.3 Heuristics 1.3.1 The Availability Heuristic 1.3.2 The Anchoring Heuristic 1.3.3 The Representativeness Heuristic Categorical Predictions The 'Law of Small Numbers' 1.4 Beliefs 1.5 Emotions 1.5.1 Gains and Losses: Prospect Theory 1.5.2 Rejoicing and Regret 1.5.3 Optimism 1.5.4 The Social Psychology of Emotions 1.6 Conclusion 2. Overtrading 2.1 Introduction 2.2 Turnover on Equity Markets 2.3 The Profitability of Individual Investor Trades 2.3.1 U.S. Studies 2.3.2 Non-U.S. Studies 2.4 Learning from Trading 2.5 Do Smart Investors Outsmart the Market? 2.6 Why Do Individual Investors Trade So Much? 2.6.1 Risk Seeking 2.6.2 Sensation Seeking 2.6.3 Stocks as Lotteries 2.6.4 Beliefs and Sentiment 2.6.5 Heuristics 2.7 Conclusion 3. Trend Chasing 3.1 Introduction 3.2 The 'Hot-Hand' Fallacy and the Gambler's Fallacy 3.3 Trend Chasing in Stock Markets 3.3.1 Experimental Evidence 3.3.2 Survey Evidence 3.4 Trend Chasing: Mutual Fund Investors 3.5 Behavioral Biases of Mutual Fund Investors 3.6 Trend Chasing in the Aggregate Stock Market 3.7 Conclusion Appendix: Dollar-Weighted Returns and Institutional Ownership 4. Growth Stocks 4.1 Introduction 4.2 The Value Premium Revisited 4.2.1 The U.S. Value Premium 4.2.2 The International Value Premium 4.3 Lottery Stock Preference, Arbitrage Risk and the Value Premium 4.4 The Persistence of Lottery Stock Preferences 4.5 Earnings Extrapolation and the Value Premium 4.6 Conclusion Appendix 4.1: Lottery Factors? Appendix 4.2: Earnings Growth Persistence: Is It There? 5. The Beta Anomaly 5.1 The Beta Anomaly Around the World 5.1.1 U.S. Evidence 5.1.2 International Evidence 5.2 The Beta Anomaly: Long-Run Consequences 5.3 Omitted Risks 5.3.1 Financial Distress 5.3.2

Wai-Mun Fong is Associate Professor at the NUS Business School, National University of Singapore, where he teaches Personal and Corporate Finance and Wealth Management to PhD, MSc and Undergraduate level students. He obtained his PhD in Financial Economics from the University of Manchester in 1992, and has since contributed to and authored various financial books and journals. His main areas of research include empirical asset pricing, investment strategies, personal finance and behavioural finance.