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Previous studies document a relationship between gambling activity at the aggregate level and investments in securities with lottery-like features. We combine data on individual gambling consumption with portfolio holdings and trading records to examine whether gambling and trading act as substitutes or complements. We find that gamblers are more likely than the average investor to hold lottery stocks, but significantly less likely than active traders who do not gamble. Our results suggest that gambling behavior across domains is less relevant compared to other portfolio characteristics that predict investing in high-risk and high-skew securities, and that gambling on and off the stock market act as substitutes to satisfy the same need, e.g., sensation seeking.
Manipulative communications touting stocks are common in capital markets around the world. Although the price distortions created by so-called “pump-and-dump” schemes are well known, little is known about the investors in these frauds. By examining 421 “pump-and-dump” schemes between 2002 and 2015 and a proprietary set of trading records for over 110,000 individual investors from a major German bank, we provide evidence on the participation rate, magnitude of the investments, losses, and the characteristics of the individuals who invest in such schemes. Our evidence suggests that participation is quite common and involves sizable losses, with nearly 6% of active investors participating in at least one “pump-and-dump” and an average loss of nearly 30%. Moreover, we identify several distinct types of investors, some of which should not be viewed as falling prey to these frauds. We also show that portfolio composition and past trading behavior can better explain participation in touted stocks than demographics. Our analysis offers insights into the challenges associated with designing effective investor protection against market manipulation.