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Odd lotteries are small investors who buy small amounts of securities, usually stocks. The odd lot theory assumes they are unsophisticated and illogical, but studies show they perform similarly to other investors. The theory can act as a self-fulfilling prophecy and deter small investors.
Odd lotteries are investors who buy a small or unusual amount of securities, usually stocks. Shares are normally 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 typically invest smaller amounts because they cannot afford to invest in larger amounts. Sometimes, an odd lottery may simply choose not to invest in a particular stock or buy small amounts of the stock as and when they are able to.
Odd lotteries are central to an idea in technical analysis called odd lot theory. This theory, popular in the 1960s and 1970s, assumes that small investors are unsophisticated, misinformed, risk averse, and illogical compared to large investors. Therefore, the theory states, every move a strange lottery makes is bound to be the wrong decision. Larger investors, seeing that an odd lot has decided to sell a particular stock, will then buy large quantities of that stock, assuming the odd lot must be wrong.
The odd lot theory has proven unreliable and has generally fallen out of favor. Studies have shown that despite a lack of knowledge in stock trading, small investors do not perform substantially worse on their investments than investors in general. Since it is almost impossible to find an investor who always makes good decisions, it is very unlikely to find an investor, even an ill-advised lottery freak, who always makes bad decisions.
Sometimes, the odd lot theory can act as a self-fulfilling prophecy. Seeing as the odd lotteries have sold one stock, major investors may decide to buy this stock in large quantities. If many investors make the same decision, stock prices will rise. This can make it seem like investing against the odd lottery was the key to success.
For some small investors, the odd lot theory can act as a deterrent. When enforced, it ensures that decisions made by the odd lottery will never pay off, as significant investors always work in opposition to them. This feeling of paranoia associated with investing can lead to more bad investment decisions by small investors.
Smart Assets.
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