Trading as Gambling

Abstract

This paper offers evidence from two very different settings consistent with individual investors substituting between playing the lottery and playing the stock market. In the U.S., increases in the multi-state lottery jackpots Powerball and Mega-Millions are associated with significant reductions in small trade participation in the stock market, other things equal. In Germany, individual-level transaction records from a discount broker show that retail investors are significantly less likely to trade in the stock market during weeks with larger prizes in the German national lottery. The negative relation between trading activity and jackpots is stronger for trading in more lottery-like securities such as options, and also for individuals who are more likely to be influenced by jackpots as judged by their location, gender, and education.

Keywords: Trading volume, individual investors, gambling

JEL Classification: G11, G12