Lottery Preference (Lottery Stocks)
Have you ever been drawn to the words 'this one stock will change your life'? This psychology of reacting unusually strongly to low-probability jackpots also has a name.
What Lottery Preference Is
Lottery preference is the psychology of being unusually drawn to lottery-like targets — where the chance of winning is very low but the payoff is huge if you succeed. In stocks, such stocks are called 'lottery-like stocks.'
The root of this psychology is 'probability weighting' from prospect theory. People tend to feel very low probabilities (e.g., 0.1%) as much larger than they really are. So they overvalue a 'nearly impossible' jackpot as if it were something that 'might just happen.'
What History Showed
So what happened when people actually invested in lottery-like stocks? The research results were the opposite of expectations.
According to Kumar's (2009) study 'Who Gambles in the Stock Market?', individual investors preferred lottery-like stocks, but these stocks on average underperformed the market. The study by Bali, Cakici, and Whitelaw (2011) is more concrete: the 'most lottery-like' stocks — those with the largest single-day gains over the past month — actually had lower subsequent returns than others, and that gap exceeded 1% per month.
These figures are the results of academic studies analyzing specific markets and periods, and there's no guarantee they'll repeat identically in the future. Still, the direction that 'choosing to chase a jackpot was, on average, a loss' has been repeatedly confirmed across several studies.
Why the Average Return Is Low
The reason lottery-like stocks tend to lose is simple: many people crowd in expecting a jackpot, so the price is already set expensively. As everyone buys thinking 'maybe it'll happen,' the price rises above the actual value, and the expected return actually falls.
Moreover, just as with a lottery, behind a few big successes lie many failures that are hard to see. Only the success stories make the news, while the stocks that quietly disappeared aren't remembered — adding an illusion (survivorship bias) that makes the success rate look higher than it really is.
It Starts with Noticing the Bias
The purpose of this article is not to tell you to buy or not buy any particular stock. The key is to notice for yourself the psychology that 'I'm unusually drawn to jackpot stories.'
If a certain stock attracts you unusually, ask yourself whether the reason you're drawn is 'the big return you're hoping for.' The simple habit of checking whether you're overvaluing a low probability can help you avoid a large part of the trap that lottery preference creates.
Frequently Asked Questions
Q. Are lottery-like stocks always bad?
It doesn't mean 'always bad'; it means there's research showing that on average their expected return was low. Among individual stocks, some did in fact rise sharply. The problem lies in the bias of feeling that jackpot probability as larger than it really is. In other words, this article warns about the psychology of viewing the stock, more than the stock itself.
Q. Do meme stocks or penny stocks also count?
A stock that swings sharply based on hype and makes you hope for 'one big hit' can have lottery-like characteristics. But judging a specific stock as good or bad is beyond the scope of this article. The point is to examine whether, for any target, a 'jackpot hope' is clouding your judgment.
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📋 Results are based on historical data; past returns do not guarantee future returns.
📋 This service is provided for educational purposes to help you understand investing, not as investment advice.