Financial Update (Fourth Quarter 2002)


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New Atlanta Fed Chairman

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High-Tech Stock Performance

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The Docket

Do High-Tech Stocks Perform Like Lottery Tickets?

Picture of Lottery Ticket

Today, after the dramatic falloff in stock prices in 2001, many technology stocks seem to be highly priced relative to the firms’ likely prospects. This concern can always be raised about any firm — even “old-economy” businesses like automobile manufacturers — but the enthusiasm for high-tech stocks seems especially disproportional and hard to fathom. There are many explanations for the prices of Internet stocks, including craziness or euphoria on the part of investors.

One theory that has occurred to various observers is that technology stocks are like lottery tickets. People buy a stock like with a few thousand dollars and hope that they will strike it rich. If Amazon goes bust, the investor sustains a small loss. If Amazon is the next Wal-Mart, it’s time to celebrate. People buy lottery tickets for the same reasons: Most buyers lose; a few win big. Many people are willing to have an expected loss when there is the possibility of getting rich.

According to the authors of a recent Atlanta Fed working paper, the experiences of investors in prior new industries can be informative about what investors might reasonably expect. Do some people get rich? Or do investors on average lose?

In Working Paper 2002-15, Gerald Dwyer and Cora Barnhart examine the expected returns from investing in new industries. They look at U.S. data on sellers of stock in a variety of businesses, including personal computers, airlines and airplane manufacturers, automobile manufacturers, railroads and telegraphs. The evidence unambiguously indicates that investors in new industries have received positive expected returns — far from zero. In general, those expected returns have been very high relative to comparable returns on diversified stock portfolios. The authors also interpret the evidence as indicating that some investors do extremely well.

The full text of the paper is available on the Atlanta Fed’s Web site ( under Publications.