Lottery-Related Anomalies: The Role of Reference-Dependent Preferences
71 Pages Posted: 28 Jul 2015 Last revised: 31 Jul 2018
Date Written: July 1, 2018
Previous empirical studies find that lottery-like stocks significantly underperform their non-lottery-like counterparts. Using five different measures of the lottery features in the literature, we document that the anomalies associated with these measures are state-dependent: the evidence supporting these anomalies is strong and robust among stocks where investors have lost money, while among stocks where investors have gained profits, the evidence is either weak or even reversed. Several potential explanations for such empirical findings are examined and we document support for the explanation based on reference-dependent preferences. Our results provide a unified framework to understand the lottery-related anomalies in the literature.
Keywords: prospect theory, lottery, reference point, skewness, default, failure probability, capital gains overhang
JEL Classification: G02, G12, G14
Suggested Citation: Suggested Citation