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Why Investors Prefer Stocks with Fluent Stock Symbols

Saturday, November 23rd, 2013 Leave a comment Go to comments

Most investors utilize various forms of fundamental and technical analysis when determining what equities to trade. Whether a stock’s ticker symbol is pronounceable usually doesn’t drive investment decisions. Interestingly, though, there appears to be data that suggests that stocks with pronounceable symbols enjoy bigger post-I.P.O. returns than their unpronounceable counterparts.

More on this from The New Yorker:

Several years ago, Daniel Oppenheimer and I [Adam Alter] examined the performance of nearly a thousand stocks that entered the New York Stock Exchange and American Exchange between 1990 and 2004. We separated stocks with pronounceable ticker symbols from those with unpronounceable symbols. Across both markets, stocks with pronounceable symbols enjoyed a bigger post-I.P.O. boost than their unpronounceable counterparts. The effect was strongest during the first few days of trading; over time, it weakened, but never quite vanished. A trader who invested a thousand dollars across the companies with pronounceable ticker codes would have emerged eighty-five dollars wealthier after one day of trading than a trader who put the same thousand dollars in companies with unpronounceable codes. (We also made sure that our results weren’t driven by extraneous factors, like differences between the foreignness, size, or industry type of companies with pronounceable and unpronounceable ticker symbols.) While these effects are surprising, we also found that companies with simpler names (like NOVA Corporation) outperformed those with complex names (Magyar Telekom Távközlési Részvénytársaság). Other researchers have since found similar results.

 

So why do some investors seem to base their investment decisions in part on a stock’s ticker symbol?

The answer is that reading pronounceable ticker symbols is slightly less mentally taxing; people generally prefer objects and events that are more “cognitively fluent,” or easier to process. The same logic explains why we tend to prefer people with simpler names, and why the aphorism “caution and measure win you treasure” seems truer than “caution and measure win you riches.” In each case, the more fluent concept seems more familiar, less risky, less threatening, and more trustworthy—and the same is true of stocks and, more broadly, of economic decisions. Few investors admit to choosing a stock based on its name; biases like these are powerful precisely because they operate below the surface of conscious awareness.

 

Source: The New Yorker

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