Odd lotteries are small investors who buy an unusual amount of stocks. The theory of odd lots assumes they make bad decisions, but studies show they do not fare much worse than general investors. The theory can act as a self-fulfilling prophecy and deter small investors.
Odd lotteries are investors who buy an amount of security, usually stocks, that is small or unusual. Stocks are typically traded in “round lots” of 100 shares, and purchases of less than 100 shares are known as odd lots.
Odd lotteries are usually small investors who make their own investment decisions. They generally invest smaller amounts because they cannot afford to invest larger amounts. Sometimes an odd lotter may simply choose not to be as invested in a particular stock or buy as small amounts of shares as and when they can.
Odd lotteries are central to an idea in technical analysis called the theory of odd lots. This theory, popular in the 1960s and 1970s, assumes that small investors are unsophisticated, misinformed, risk averse, and illogical compared to large investors. Therefore, according to the theory, every move that a strange lottery makes is a wrong decision. Larger investors, seeing that an odd lottery has decided to sell a particular stock, will buy large amounts of that stock, assuming that the odd lottery must be wrong.
The odd batch theory has been shown to be unreliable and has generally fallen out of favour. Studies have shown that despite the lack of knowledge in stock trading, small investors do not fare much worse on their investments than general investors. Juat, since it is almost impossible to find an investor who makes good decisions all the time, it is highly unlikely that you will find an investor, even a strange and ill-advised lottery, who makes bad decisions all the time.
Sometimes the odd batch theory can act like a self-fulfilling prophecy. Seeing that the odd lotteries have sold a stock, major investors may decide to buy this stock in large quantities. If many investors make this same decision, it will drive up stock prices. This can make it seem like investing against the odd lottery was the key to success.
For some small investors, the theory of odd lots can be a deterrent. If applied, it all ensures that the decisions made by the odd lottery will never pay off, as major investors are always working in opposition to them. This feeling of paranoia associated with investing can lead to further poor investment decisions by small investors.
Smart Asset.
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