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The role of psychological barriers in lottery-related anomalies

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  • Byun, Suk-Joon
  • Goh, Jihoon
  • Kim, Da-Hea

Abstract

It is well documented that stocks with lottery-like characteristics are overpriced. We find that the lottery-related anomaly exists primarily among stocks that are far from their 52-week high prices. When implemented among such stocks, the strategy of buying the least lottery-like stocks and selling the most delivers a significantly positive risk-adjusted return of 2.22% per month. In contrast, it yields an insignificant negative return of -0.31% per month for stocks near their 52-week high. The pattern holds after controlling for capital gains overhang and idiosyncratic volatility. We also find that investors’ optimistic earnings forecasts for lottery-like stocks are attenuated by their nearness to the 52-week high. Our findings suggest that investors consider the 52-week high as the upper price limit and that this psychological barrier affects their preferences for lottery-like stocks.

Suggested Citation

  • Byun, Suk-Joon & Goh, Jihoon & Kim, Da-Hea, 2020. "The role of psychological barriers in lottery-related anomalies," Journal of Banking & Finance, Elsevier, vol. 114(C).
    • Handle: RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300546
    DOI: 10.1016/j.jbankfin.2020.105786
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    Cited by:

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    4. Lee A. Smales & Zhangxin (Frank) Liu & Cameron D. Robertson, 2022. "One session options: Playing the announcement lottery?," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(2), pages 192-211, February.
    5. Lin, Mei-Chen, 2023. "Time-varying MAX preference: Evidence from revenue announcements," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    6. Wang, Zi-Mei & Lien, Donald, 2023. "Limited attention, salient anchor, and the modified MAX effect: Evidence from Taiwan’s stock market," The North American Journal of Economics and Finance, Elsevier, vol. 67(C).
    7. Chen, Chun & He, Fangyi & Lin, Lei, 2024. "Anchoring effect, prospect value and stock return," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1539-1556.
    8. Lin, Chaonan & Chen, Hong-Yi & Ko, Kuan-Cheng & Yang, Nien-Tzu, 2021. "Time-dependent lottery preference and the cross-section of stock returns," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 272-294.
    9. Gao, Ya & Bradrania, Reza, 2024. "Property crime and lottery-related anomalies," Global Finance Journal, Elsevier, vol. 59(C).
    10. Caglayan, Mustafa O. & Lawrence, Edward & Reyes-Peña, Robinson, 2023. "Hot potatoes: Underpricing of stocks following extreme negative returns," Journal of Banking & Finance, Elsevier, vol. 149(C).
    11. Wang, Zhuo & Wang, Ziyue & Wu, Ke, 2023. "The role of anchoring on investors’ gambling preference: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    12. Gould, John & Yang, Joey W. & Singh, Ranjodh & Yeo, Ben, 2023. "The seasonality of lottery-like stock returns," International Review of Economics & Finance, Elsevier, vol. 83(C), pages 383-400.
    13. Annaert, Jan & De Ceuster, Marc & Van Doninck, Freek, 2022. "Decomposing the idiosyncratic volatility anomaly among euro area stocks," Finance Research Letters, Elsevier, vol. 47(PB).
    14. Khasawneh, Maher & McMillan, David G. & Kambouroudis, Dimos, 2024. "Left-tail risk and UK stock return predictability: Underreaction, overreaction, and arbitrage difficulties," International Review of Financial Analysis, Elsevier, vol. 95(PA).

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    More about this item

    Keywords

    Prospect theory; Lottery; Skewness; Psychological barrier; 52-week-high price; Anchoring bias;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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