West Loop Financial LLCInvestors Like Lotteries – West Loop Financial LLC https://www.westloopfinancial.com Evolutionize Site Wed, 19 Aug 2020 20:50:49 +0000 en-US hourly 1 https://wordpress.org/?v=5.1.22 Investors Like Lotteries https://www.westloopfinancial.com/2016/08/15/investors-like-lotteries/ https://www.westloopfinancial.com/2016/08/15/investors-like-lotteries/#respond Mon, 15 Aug 2016 09:00:28 +0000 http://evolvemypractice.com/?p=3057 There’s substantial evidence from the field of behavioral finance that individual investors have a strong preference for investments that exhibit the same characteristics as lottery tickets. Two of these characteristics are high kurtosis (or fat tails) and positive skewness, meaning values to the right of (or more than) the mean are fewer but farther from...

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]]> There’s substantial evidence from the field of behavioral finance that individual investors have a strong preference for investments that exhibit the same characteristics as lottery tickets. Two of these characteristics are high kurtosis (or fat tails) and positive skewness, meaning values to the right of (or more than) the mean are fewer but farther from it than values to the left of (or less than) the mean.

And just as is the case with lottery tickets, this preference leads investors to overinvest in the most highly skewed (right-skewed) securities. Increased demand leads to higher prices, with the consequence being that such securities will have lower subsequent average returns.

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