As religious faith plays a crucial role in people’s lives and largely influences their behavior as well as their decision making, the study of religiosity has a long tradition in many social science disciplines. Nevertheless, this relationship became only a topic of interest in modern economic studies since the last quarter of the twentieth century, when Ehrenberg and Azzi (1975) developed a utility-maximizing model taking into account both lifetime and afterlife utility (see, for example, Iannaccone, 1998; Jackson and Fleischer, 2007). In 2012, around 91% of the US American population professed to ”believe in God or a universal spirit” (Lugo, 2012), suggesting that if religion does shape economic behavior, it should also affect aggregate market outcome. Hence, studies investigate both microand macroeconomic effects of religiosity 2 , while some recent papers specifically address the relationship between religion and financial decisions: risk aversion and speculative behavior in particular are believed to depend on religious adherence. Not only have studies linked religiosity with a higher level of pure risk aversion in corporate decision making (Hilary and Hui, 2009), but also suggests current research that religious beliefs spill over in investment decisions due to different notions of gambling. For instance, Kumar (2009) found Catholics to be more willing to take on speculative risk by investing more in risky stocks than Protestants do. This paper aims to critically review Kumar, Page, and Spalt (2011) and structures as follows: firstly the theoretical framework of gambling in economics will be presented with a focus on cumulative prospect theory and its implications for asset pricing. Then follows a comprehensive overview of the theoretical background and empirical findings of the paper with focus on the influence of religion on investors’ portfolio decisions and on overpricing of initial public offerings. The subsequent section discusses the hypotheses of Kumar, Page, and Spalt (2011). Eventually, the last section concludes with a summary of the main findings in a broader context and with an outlook on future research.
Table of Contents
1 Introduction
2 First insights into gambling in financial markets
2.1 Cumulative prospect theory
2.2 Asset pricing
3 Religious beliefs and gambling propensities
4 Results
4.1 Empirical Analysis
4.2 Investors’ portfolio decisions
4.3 Employee stock option plans
4.4 IPO overpricing and lottery stocks
5 Conclusion
6 Discussion
Objectives and Topics
The primary objective of this paper is to critically review the research by Kumar, Page, and Spalt (2011) regarding the influence of geographically heterogeneous religious beliefs on financial market outcomes, using religiosity as a proxy for gambling propensity.
- Theoretical foundations of gambling and cumulative prospect theory in economics.
- The relationship between religious affiliation (Catholics vs. Protestants) and speculative risk tolerance.
- Impact of religious beliefs on institutional investors' portfolio decisions and IPO overpricing.
- Analysis of employee stock option plans as a form of speculative investment.
- Broader economic implications of cultural and religious norms on market behavior.
Excerpts from the Book
3 Religious beliefs and gambling propensities
Referring to the theoretical considerations in the previous section, Kumar, Page, and Spalt (2011) suggest that geographically heterogeneous gambling attitudes influence financial market outcome. Despite the predictions that Barberis and Huang (2008) allow to make, speculative behavior and its impact on financial markets are difficult to measure, since gambling preferences cannot be observed directly (Kumar, Page, and Spalt, 2011). They proposed the use of individual’s religious beliefs as a proxy to investigate the aggregate effects of gambling activities. To test their hypothesis, they specifically examined the relation between portfolio returns, the popularity of employee stock plans (ESO), overpricing of IPOs, negative premiums for lottery stocks and the local predominant religious denomination.
Based on the observation that the attitude towards speculative behavior varies between denominations, Kumar, Page, and Spalt (2011) chose religious beliefs as a substitute for gambling propensities. For instance, the Catholic church proclaims a more liberal attitude towards gambling, and even organizes bingo and lotteries to raise fo charity. Empirically, this approach has also been linked to higher lottery sales and more permissive lottery policies (see, e.g. Grichting, 1986; Diaz, 2000; Kumar, Page, and Spalt, 2011). On the contrary, Protestants are taught gambling to be a sin (inter alia Starkey, 1964), and Grichting (1986) and Diaz (2000) showed that tolerance and condemnation respectively translate into actual behavior when investigating gambling in Australia and Las Vegas.
Summary of Chapters
1 Introduction: Provides an overview of the role of religious faith in decision-making and introduces the research focus on the relationship between religiosity, risk aversion, and speculative behavior.
2 First insights into gambling in financial markets: Discusses the theoretical framework, including expected utility theory and cumulative prospect theory, and explains how these models relate to asset pricing.
3 Religious beliefs and gambling propensities: Introduces religious affiliation as a proxy for gambling propensity and outlines the specific financial variables examined in the study.
4 Results: Presents the empirical analysis of the data, focusing on portfolio decisions, employee stock option plans, and IPO overpricing.
5 Conclusion: Summarizes the key findings, confirming that higher concentrations of Catholics correlate with a greater tolerance for speculative risk in financial markets.
6 Discussion: Places the findings in a broader academic context by comparing them with other studies on risk-taking behavior and corporate policy.
Keywords
Religiosity, Gambling, Financial Markets, Cumulative Prospect Theory, Asset Pricing, Portfolio Decisions, IPOs, Speculative Behavior, Catholics, Protestants, Risk Aversion, Employee Stock Options, Behavioral Economics, Lottery Stocks, Institutional Investors
Frequently Asked Questions
What is the fundamental focus of this research?
The paper examines how religious beliefs act as a proxy for individual gambling propensities and how these differences influence financial market outcomes in the United States.
What are the central thematic areas covered?
The research covers cumulative prospect theory, asset pricing models, the correlation between religious denominations and gambling attitudes, and various financial metrics such as portfolio returns and IPO overpricing.
What is the primary research question?
The study asks whether geographically heterogeneous gambling attitudes, as proxied by religious beliefs, affect aggregate outcomes in financial markets.
Which scientific method is utilized?
The paper performs a critical literature review and utilizes econometric regression models to test the hypotheses established by Kumar, Page, and Spalt (2011) regarding the relationship between religious denomination and financial behavior.
What topics are discussed in the main body?
The main body discusses the theoretical framework of gambling in economics, empirical findings related to institutional portfolio decisions, the popularity of employee stock options, and the overpricing of initial public offerings.
Which keywords best characterize this work?
Key terms include religiosity, gambling, speculative behavior, cumulative prospect theory, portfolio decisions, and financial market outcomes.
How does the Catholic vs. Protestant distinction influence findings?
The study suggests that Catholics generally show more liberal attitudes toward gambling, which translates into higher weights in lottery-like stocks and more speculative financial behavior compared to Protestants.
Why is the focus specifically on the United States?
The focus on the US helps to avoid the obfuscating effects of country-specific variables like differing legal systems or financial regulations that would complicate cross-country comparisons.
Are the results applicable to Europe?
The author notes that the results might not be directly applicable to Europe, as European countries generally exhibit lower levels of religiosity compared to the US.
- Citation du texte
- Maximiliane Brecht (Auteur), 2014, Review of "Religious Beliefs, Gambling Attitudes and Financial Market Outcomes", Munich, GRIN Verlag, https://www.grin.com/document/300166
