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Stock market gamblers: Read this! – CBS News

Money Watch If you’re like most investors you’re highly averse to the risk of large losses. That risk aversion leads investors to demand risk premiums for stocks that have the potential for large losses — they exhibit excess kurtosis fat tails and negative skewness when the values to the left of [less than] the mean are fewer but farther from the mean than values to the right of the mean.

On the other hand, there have been several studies from the field of behavioral finance that have found that if you’re like most investors you have a preference, or what professors Eugene Fama and Ken French referred to as “taste,” for stocks that exhibit excess kurtosis and positive skewness like a lottery ticket. This is either irrational investors don’t know they are making suboptimal decisions or investors in such stocks derive some extra “non-wealth” utility such as entertainment value from these investments. That preference drives up the prices of these stocks, leading to negative risk premiums for them. The result is below market returns.

The study, “Speculative Retail Trading and Asset Prices,” by Bing Han and Alok Kumar, published in the Journal of Financial and Quantitative Analysis, examined the characteristics and pricing of stocks that are actively traded by speculative retail investors. They defined the retail trading proportion RTP of a stock as the monthly dollar value of the buy- and sell-initiated small-trades trade size below $5,000 divided by the dollar value of its total trading volume in the same month. The following is a summary of the author’s findings:

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