Do Individual Investors Trade Stocks as Gambling? Evidence from Repeated Natural Experiments

Abstract:     
Multiple natural experiments of large jackpot lotteries in Taiwan are used to document that some individual investors trade stocks as a form of gambling, whereby those investors substitute lottery gambling for stock trading. Our study accentuates the following findings. First, when the jackpot exceeds 500 million Taiwan dollars, the number of shares traded by individual investors decreases between 6% and 10% among stocks with high individual trading fraction, low market capitalization, high past returns, and high past turnover, and the effect is statistically significant. Second, the reduction in individual trading ranges between 5.4% and 7% among stocks with lottery features. Third, the magnitude of the decline increases monotonically with the jackpot size. Fourth, firm-level trading activity reacts negatively to large jackpots and is statistically significant for a sizable number of firms. Fifth, the aggregate trading activity by individual investors declines by about 5% on large jackpot days. Sixth, the substitution effect is preserved when the lottery sales and the size of the jackpot are employed as alternative instruments for gambling. Finally, the substitution effect is found to adversely affect the liquidity among certain types of stocks, while it fails to show up in the options market and in stock trading by institutional investors.

Number of Pages in PDF File: 47

Keywords: Natural experiments, lottery, stock trading, substitution effect, investor attention, behavioral trading needs

JEL Classification: G10, G12, G13, G51

working papers series