The Allure of the Financial Jackpot
When a company first goes public on the stock exchange, the corresponding securities are referred to as IPO (initial public offering) shares. These shares are typically characterized by their below-average returns for the majority of investors. Only a very small fraction become a Google or an Amazon — the rare super performers that dominate headlines and mutual fund fact sheets.
So why do people still purchase IPO shares? Because they overestimate the probability of the stock becoming one of those rare outliers. This phenomenon is described by prospect theory, the leading framework used to explain decision-making under uncertainty. It is a similar story when people purchase lottery tickets: they are hoping to hit the jackpot, and they systematically overweight the small chance of a life-changing payoff.
There are also investments that produce a very different distribution of profits and losses — a high likelihood of small returns, which is arguably the standard case in finance. Catastrophe bonds, or "cat bonds," sit at this opposite extreme. Insurance companies use these bonds to create a financial cushion that enables them to guarantee coverage in the event of a disaster. If nothing happens, investors receive a series of small payouts. In the statistically unlikely event of a major natural disaster, however, all of the money they invested can be lost.
The puzzling question is what actually tips a person toward one end of that spectrum or the other. Is it a sober calculation of expected value — or something about how returns are presented?
The Experiment: Choosing Stocks Day by Day
Dr. Sebastian Olschewski of the Faculty of Psychology at the University of Basel set out to answer that question in a study published in the journal PNAS. In the experiment, test subjects were asked to choose between two or three different stocks — for example, one offering "a low probability of high returns" and another offering "a high probability of modest returns with rare but potentially high losses."
Crucially, the researchers controlled what information the decision-makers saw. To aid in the decision-making process, participants were given performance histories for the stocks: when and what returns were generated by each specific stock on day 1, day 2, day 3, and so on. This allowed the test subjects to closely examine both the volume and the frequency of returns from each individual stock, learning about the options through experienced outcomes rather than abstract statistics.
That design detail turned out to be the heart of the finding. The way return information is encountered — as a sequence of day-by-day experiences that can be directly compared — reshapes preferences in a way that pure expected-value reasoning cannot explain.
The Frequent Winner Effect
The results showed that simply having the possibility to compare different stock types greatly affects a person's decision, and in a way that favors investments on the cat-bond end of the spectrum.
"In our experiment, the test subjects selected stocks that generated the highest returns on the greatest number of days. The overall total of the returns had only an ancillary effect," Olschewski explained. This is what experts refer to as the "frequent winner effect": an option wins attention and choice not because it pays the most in aggregate, but because it wins more individual day-to-day comparisons.
To demonstrate the weight of this effect, the researchers ran a second experimental design in which the data on stock returns was modified so that the "lottery-like" investments more frequently showed the higher yields on a given day. Preferences quickly shifted toward that type of stock. In other words, the tilt toward lottery-style risk was not a stable personality trait or a deep appetite for skewness, it followed whichever option happened to be the frequent winner in the day-by-day history.
Reconciling a Decade of Contradictory Findings
The PNAS paper, titled "Frequent winners explain apparent skewness preferences in experience-based decisions," places the result in a broader scientific context. Do people's attitudes toward the symmetry of an outcome distribution affect their choices? Financial investors in real markets tend to seek return distributions with frequent small returns but few large ones, consistent with leading models of choice in economics and finance that assume right-skewed preferences. Yet many experiments in which decision-makers learn about options through experience find the opposite tendency: a taste for left-skewed options with rare big gains.
Across seven studies, Olschewski and colleagues show that these seemingly contradicting findings can be reconciled. The apparent preference for left-skewed outcome distributions in experiments is a consequence of those distributions having a higher value in most direct outcome comparisons, a frequent-winner effect. By manipulating which option is the frequent winner, the researchers obtained choice tendencies that could be produced even with identical outcome distributions. Systematic preferences for right- or left-skewed options could be switched on by manipulating which option was experienced as the frequent winner.
The team also found evidence for an intrinsic preference for right-skewed distributions, meaning the steady-gains instinct exists underneath, but the day-by-day comparison signal can overpower it. Computational analyses supported the account: a reinforcement-learning model that captures both frequent winning and intrinsic skewness preferences provided the best fit to the data, and the frequent-winner phenomenon proved robust to variations in outcome distributions and experimental paradigms.
Why Frequency Feels Like Value
The mechanism has an intuitive logic. Human memory and attention do not easily sum a long series of payoffs into a single expected value. What sticks is a countable story: on how many days did this stock beat that one? A fund that posts modest gains in most months feels safer, more competent, more chosen, even when a rival with a lumpier record delivers more wealth overall. A single spectacular quarter can do the same work in reverse, making a volatile fund look like the winner of the season despite frequent small disappointments along the way.
This is also why the lottery illusion around IPOs persists. The handful of super performers wins the comparison that investors actually remember, and the many days and years of below-average returns recede from view. Frequency of visible wins, not the size of the final tally, becomes the proxy for quality.
Implications for Markets, Analysts and Pension Funds
What conclusions can be drawn from the study? "If we want to predict how the stock market will perform, we also need to consider how people go about finding information," says Olschewski, "whether they simply research a single stock or compare two or three options." If prices are partly set by investors whose preferences are steered by which option happens to be the frequent winner in the data they happened to see, then price dynamics cannot be modeled with expected-value agents alone.
That matters for economists and analysts who want to predict price trends on the stock market, but it extends well beyond trading desks. It matters for social resources planning, for instance, when governments invest for the benefit of their citizens. The Swiss pension system, as the researcher points out, is partially invested in the capital market, and the design of the information shown to the people who allocate those funds can quietly shape outcomes. The work highlights, in the authors' words, the need for theories of decision-making that are sensitive to the joint outcome distributions of the available options, how choices look side by side, not just in isolation.
What This Means for Your Own Decisions
For individual investors, the study is less a trading rule than a warning about the frame. A few practical guardrails follow directly from the findings:
- Look at totals, not tallies. Because the frequency of gains sways judgment, deliberately compute cumulative and expected returns before the streak of daily wins settles the question for you.
- Be aware that the comparison set changes the choice. Viewing one stock alone versus two or three side by side can flip preferences, the same investment can be a winner or a loser depending on the company it is shown in.
- Interrogate presentations of history. Monthly factsheets, app notifications and scorecards all choose a time unit. A "win rate" over days or months is a frequent-winner statistic, not a measure of wealth creation.
- Resist the outlier story. IPO hype is a textbook case of overweighting the rare super performer; base rates say most IPO shares return below average.
None of this says steady-gain investments are automatically superior or that skewed upside never pays. It says the psychological pull of "wins on most days" is powerful, measurable, and, as the Basel team showed by flipping which option was the frequent winner, manipulable.
The Bigger Picture
The frequent winner effect reframes an old question in behavioral finance. Investors are neither the rational expected-value calculators of textbook economics nor simply lottery addicts chasing jackpots. They are comparison-driven decision-makers whose taste for risk can be assembled, or reversed, by the sequence of outcomes they observe. Understanding that, as the University of Basel research suggests, is essential for anyone who predicts markets, regulates information disclosure, or simply tries to choose a stock on a quiet Tuesday and not be ruled by the scoreboard of daily wins.
Based on research by Sebastian Olschewski et al., "Frequent winners explain apparent skewness preferences in experience-based decisions," PNAS, reported by the University of Basel via Neuroscience News (March 2024).
