Do the Rich Gamble in the Stock Market? Low Risk Anomalies and Wealthy Households

Contrary to the theoretical principle that higher risk is compensated with higher expected return, the literature shows that low-risk stocks outperform high-risk stocks. Using a large-scale household dataset, we provide an explanation for this puzzling result that the anomalous negative risk-return relation is only confined to those stocks held by rich households, whereas the anomaly disappears for stocks held by non-rich households and institutional investors. We find that skewness preference and optimism of rich households as well as their attention/attraction to lottery stocks explain wealthy investors' demand for high-risk stocks, leading to overpricing and low future returns for such stocks