So why are investors and professionals following a flawed model? Lazzara said one reason is psychology, or what he called the “lottery effect.” Lazzara said both lottery players and some investors think that they are acting rationally when they make bets with little chance of winning.
“People buy high-beta stocks even though they know it is big risk because they say it might be the next Apple. It might be the next Google.”
He compared investing in high-beta stocks with buying a lottery ticket even though the chances of winning a big prize are nearly impossible.
Lazzara argued that if you “systematically avoided” high-volatility stocks, “you will do better over the long term.”