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Are stocks in new industries like lottery tickets?

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Author Info
Gerald Dwyer
Cora Barnhart

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Abstract

We examine the distribution of returns in new industries to determine whether stocks in new industries are similar to lottery tickets. We focus on one characteristic of lottery tickets: negative expected returns. We examine data from the United States on sellers of own-brand personal computers, airlines and airplane manufacturers, automobile manufacturers, railroads, and telegraphs. A relatively small number of companies generate outstanding returns in some industries. We find no evidence of low expected returns. On the contrary, firms in new industries typically have high volatility of individual stocks’ returns and high expected returns relative to indexes for the same periods. None of our evidence suggests that investors reasonably might expect to pay to play when investing in new industries.

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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2002-15.

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Date of creation: 2002
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Handle: RePEc:fip:fedawp:2002-15

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Keywords: Stocks ; Stock - Prices;

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  1. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279. [Downloadable!] (restricted)
  2. Ng Yew Kwang, 1965. "Why do People Buy Lottery Tickets? Choices Involving Risk and the Indivisibility of Expenditure," Journal of Political Economy, University of Chicago Press, vol. 73, pages 530. [Downloadable!] (restricted)
  3. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May. [Downloadable!] (restricted)
  4. Jensen, Michael C, 1993. " The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Finance, American Finance Association, vol. 48(3), pages 831-80, July. [Downloadable!] (restricted)
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  5. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(02), pages 127-151, June. [Downloadable!]
  6. John H. Cochrane, 2001. "The Risk and Return of Venture Capital," NBER Working Papers 8066, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Clotfelter, Charles T & Cook, Philip J, 1990. "On the Economics of State Lotteries," Journal of Economic Perspectives, American Economic Association, vol. 4(4), pages 105-19, Fall. [Downloadable!] (restricted)
  8. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151. [Downloadable!] (restricted)
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