Topic:Lottery-Related Anomalies: The Role of Reference-Dependent Preferences

Speaker: LE Li Assistant Professor, School of WUDAOKOU Finance, Tsinghua university

Location: EMS B253

Time: 14:30-16:00 2 April, 2015

Abstract:

This paper studies the role of reference-dependent preferences in explaining several anomalies related to lottery-like assets. Recent studies find that lottery-like assets significantly underperform non-lottery-like assets. Previous explanations usually rely on investors' unconditional preference for lottery-like assets, probably due to their overweighting of small probability events. We show that lottery-elated anomalies are significant only among stocks where investors have lost money. Among stocks where investors have profited, evidence for lottery-related anomalies is either very weak or even reversed. Our findings provide support for the reference-dependent preference under which investors are averse to losses and will prefer lottery-like assets following prior losses as such assets provide a chance to recover losses. Our findings are robust to five different measures of the lottery feature of stocks and provide a unified framework to understand lottery-related anomalies that are associated with these measures.