How comparison options affect stock buys

(Image: Pixabay CC0) Should I invest my money with a small chance of big returns? Or is it better to pick investments that promise a series of modest returns? A psychologist from the University of Basel conducted a scientific experiment to study when people prefer certain types of investments. 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 first few years after the initial offering - with the exception of a few outliers that boom right from the start. In other words, the likelihood of high returns is rather small. So why do people still purchase IPO shares? Because they overestimate the probability of the stock becoming one of the rare super performers. This phenomenon is described by prospect theory, the leading theory used to explain decision-making in the face of uncertainty. It's a similar story when people purchase lottery tickets: they are hoping to hit the jackpot. There are also investments that result in a much different distribution of profits and losses, with a high likelihood of small returns. This is the standard case, so to speak. On the other hand, big losses are unlikely, such as with catastrophe bonds, or "cat bonds". 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 natural disaster, however, all'of the money they have invested is lost. Then what stocks should I pick?. What circumstances affect how people select a given type of security in the first place?