When GameStop shares skyrocketed from US$20 to over US$400 in early 2021, financial experts struggled to explain why ordinary investors poured money into what appeared to be a losing bet. Traditional investment theory suggested retail traders were making irrational decisions, chasing impossibly high returns while ignoring fundamental risks. Yet this behaviour mirrored patterns that researchers had been documenting for decades – the tendency for investors to seek highly skewed payoffs when pursuing goals that seemed just out of reach.

The GameStop phenomenon highlighted a fundamental gap in how financial theory understood human behaviour. While classical models assumed people made investment decisions based purely on risk and return calculations, groundbreaking research revealed that social aspirations – the desire to achieve higher status, escape financial constraints, or attain lifestyle goals – were systematically driving investment choices in ways that completely upended traditional economic thinking.

The hidden psychology behind investment decisions

A comprehensive study published in the Journal of Financial Economics examined how social considerations fundamentally reshape investment behaviour. The research, conducted by Andreas Aristidou, Senior Data Scientist at Netflix, Dr Aleksandar Giga from TU Delft, Dr Suk Lee from UNSW Business School, and Professor Fernando Zapatero from Boston University, explored why standard utility models failed to explain numerous puzzling patterns in investment decisions.

The researchers developed what they called “aspirational utility” – a framework that recognised how social interactions create specific goals that provide significant satisfaction when achieved. As the study noted: “frequent social interactions can reinforce an aspiration for a higher social status than one’s own, either because of a status competition with a peer, or because one learns – during the course of social interactions – that high status can reward that person with favourable social outcomes (for example, respect).”

To ground their theory in observable behaviour, the researchers examined how different social classes pursued distinct status symbols. Using US survey data, they report that lower-class households (28% of the population) typically aspired to jewellery and apparel worth around $12,000, middle-class families (52% of the population) pursued suburban homeownership averaging $532,000, while upper-class individuals (19% of the population) sought luxury items like boats worth $2.9 million. They use these results to motivate an aspirational utility, which they use to construct their theoretical analysis.

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The methodology combined theoretical analysis with two novel laboratory experiments involving 126 university students across 13 experimental sessions. Participants faced choices between financial securities with varying risk profiles, while researchers manipulated aspiration points through potential charitable donations that would be made if certain thresholds were reached.

“Much of the discourse on investments – from academics and practitioners alike – revolves around the return (how profitable) and risks (“downside”) involved,” explained UNSW Business School’s Dr Lee. “Quite differently, though, this study was initiated with a goal to investigate how these social and psychological aspects affect ‘skewness’ in investment decisions.”

Some investments promise positive skewness, like a lottery ticket that delivers a small chance of winning big (although at the expense of a much likely but small loss), said Dr Lee. Other investments offer negative skewness, which he said is effectively a "mirror image" of a lottery, with a small chance of big losses compensated by a high chance of modest gains. "We were motivated by the fact that skewness could come in different forms – from the most positive to the most negative, and everything in between, and wanted to understand how these affected risk-taking decisions.”

The four seasons of financial gambling

The research revealed a fascinating pattern that the authors dubbed “the four seasons of gambling”. Depending on how close or distant someone’s aspiration was from their current financial position, investors systematically chose different types of risk.

When aspirations sat just within reach, investors actually preferred negatively skewed investments – those offering modest gains most of the time but catastrophic losses occasionally. The research documented real-world examples of this behaviour, including investors who sold out-of-the-money options to collect small premiums while facing unlimited downside risk, and the popularity of exchange-traded products that shorted the VIX volatility index. These strategies worked well during normal market conditions but proved devastating during events like the 2018 “Volmageddon,” when VIX soared 115% overnight and several funds collapsed.

The logic proved surprisingly sound: when the next milestone was achievable, investors rationally chose strategies that maximised their chances of reaching that goal, even at the cost of potential disasters.

Conversely, when aspirations seemed distant or nearly impossible, investors pivoted toward positively skewed investments – the classic “lottery ticket” approach. Here, they accepted high chances of small losses in exchange for tiny chances of massive gains. This pattern explained why lower-income households often avoided diversified stock portfolios in favour of highly concentrated, risky bets.

The research showed that the further people's financial goals were from their current situation, the more they moved from 'safe but steady' strategies toward ‘long-shot lottery’ approaches. This insight helped explain why wealthy individuals might suddenly embrace high-risk strategies when pursuing upper-class lifestyle aspirations, despite having substantial assets to protect.

Beyond individual choices: Market-wide implications

The aspirational model solved several longstanding puzzles in financial markets. It explained why the disposition effect – the tendency to sell winning investments too early while holding losing positions too long – occurred alongside active stock market participation. Previous theories suggested that investors prone to the disposition effect should be too pessimistic to invest in stocks at all, creating a logical contradiction.

The research demonstrated how aspiration created a common factor that simultaneously encouraged risk-taking and generated the disposition effect. When investments moved closer to aspiration levels, investors naturally reduced their exposure to preserve gains. When investments moved away from aspirations, they maintained or increased risky positions to bridge the growing gap.

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Interestingly, the pattern extended beyond financial markets. The researchers noted how aspirational thinking explained various forms of negative skew-seeking, including tax evasion (modest gains most of the time, severe penalties if caught) and performance-enhancing drug use in sports (improved results typically, career destruction if detected). As they observed, such behaviour was “likely to go undetected and leave the perpetrator with gains – such as a win, a record or a medal that endows the player with superiority status.”

Dr Lee and his research co-authors are working on a separate but related project that explores how ‘skew-seeking’ could help better understand the relationship between managerial pressure and financial misconduct. He explained: “For example, a manager might be pressured to meet market expectations (say, analyst consensus on the firm’s future stock price) may be tempted to use ’shady measures’ – such as earnings management, channel stuffing, or untruthful disclosure in order to meet the target,” said Dr Lee.

Decoding low-income investment behaviour

The study also illuminated why lower-income households exhibited seemingly suboptimal investment behaviour. Rather than representing ignorance or bias, their reluctance to diversify and their limited stock market participation reflected optimal responses to their aspirational goals. The researchers explained that these households were “optimally diverting their investments towards assets with more skewed payoffs, in lieu of stocks”.

This insight reframed common criticisms of retail investor behaviour. When financial advisors observed clients concentrating investments in individual stocks rather than diversified portfolios, or choosing cryptocurrency over traditional assets, these decisions might represent rational responses to specific aspirational targets rather than poor financial education and judgement.

The research supported this interpretation by showing that individual stock returns were generally positively skewed while market returns were negatively skewed, meaning under-diversified portfolios actually delivered the profiles that aspirational investors needed to reach distant goals.

Practical implications for investors

The research carried profound implications for how business professionals approached investment decisions and understood market behaviour. Investment advisors needed to recognise that client choices weren’t solely driven by risk tolerance and return expectations, but by deeply held aspirations that might not be explicitly articulated.

For corporate leaders, the findings suggested that employee investment behaviour in company stock plans, retirement schemes, and incentive programmes was influenced by workers’ social aspirations and status goals. Companies designing compensation packages could better align employee interests by understanding how different investment options relate to workers’ aspirational frameworks.

The research also highlighted why traditional portfolio optimisation often failed in practice. When investors held strong aspirations – whether escaping debt, funding children’s education, or achieving financial independence – they naturally gravitated toward strategies that maximised their chances of reaching those specific goals, even when such strategies appeared suboptimal from a pure risk-return perspective.