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Stock performance tied to ease of pronouncing company's name

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  • Martin Sewell
    Stock performance tied to ease of pronouncing company s name Princeton, N.J. - The ease of pronouncing the name of a company and its stock ticker symbol
    Message 1 of 1 , Jun 2, 2006
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      Stock performance tied to ease of pronouncing company's name

      Princeton, N.J. - The ease of pronouncing the name of a company and
      its stock ticker symbol influences how well that stock performs in
      the days immediately after its initial public offering, two Princeton
      University psychologists have found.

      A new study of initial public offerings (IPOs) on two major American
      stock exchanges shows that people are more likely to purchase newly
      offered stocks that have easily pronounced names than those that do
      not, according to Princeton's Adam Alter and Danny Oppenheimer. The
      effect extends to the ease with which the stock's ticker code,
      generally a few letters long, can be pronounced -- indicating that,
      all else being equal, a stock with the symbol BAL should outperform
      one with the symbol BDL in the first few days of trading.

      "This research shows that people take mental shortcuts, even when it
      comes to their investments, when it would seem that they would want
      to be most rational," said Oppenheimer, an assistant professor of
      psychology. "These findings contribute to the notion that psychology
      has a great deal to contribute to economic theory"

      Oppenheimer and Alter, a graduate student in Oppenheimer's lab and
      the study's lead author, will publish their work in the May 30 issue
      of the journal, Proceedings of the National Academy of Sciences.

      The two researchers were initially looking for a different effect
      when they stumbled upon the relationship between ease of
      pronounceability and performance. They asked a group of students to
      estimate how well a series of fabricated stocks would perform based
      only on the stocks' names.

      "We gave them the list of company names and essentially asked, 'How
      well do you think the stock would perform?'" Oppenheimer said. "At
      the time, we were primarily interested in studying whether we could
      manipulate how people interpret the feeling that information is easy
      to process. We weren't trying to study markets or companies
      initially; stocks were just an interesting domain of inquiry."

      However, the relationship was very strong -- regardless of Alter and
      Oppenheimer's attempts to manipulate students' interpretations, the
      students still believed that the easily pronounceable stocks would
      perform best.

      When they noticed how strongly name pronounceability influenced
      predictions of performance, the researchers moved beyond the lab and
      investigated the relationship between the variables in two large US
      stock markets--the New York Stock Exchange and the American Exchange.
      The effect held in the real world: the more "fluent" a stock's name
      or symbol, the more likely the stock was to perform well initially.

      "We looked at intervals of a day, a week, six months and a year after
      IPO," Alter said. "The effect was strongest shortly after IPO. For
      example, if you started with $1,000 and invested it in companies with
      the 10 most fluent names, you would earn $333 more than you would
      have had you invested in the 10 with the least fluent."

      Alter said the pair of scientists had been careful to address the
      possibility that other factors were at play in the study.

      "We thought it was possible that larger companies might both adopt
      more fluent names and attract greater investment than smaller
      companies," he said. "But the effect held regardless of company size.
      We also showed that the effect held when we controlled for the
      influence of industry, country of origin, and other factors."

      Oppenheimer cautioned that while the findings might seem highly
      significant to the investing public, they do not tell the whole story
      about how a stock might perform after its IPO, nor are they reliable
      indicators of its performance in the long run.

      "Despite the implications of these findings, investors as a group
      tend to correct themselves in the presence of new information about
      how the markets operate," he said. "You shouldn't make changes to
      your stock portfolio based on our findings. The primary contribution
      of this paper is to add a piece to the jigsaw of understanding how
      markets operate."

      What the findings did offer, Oppenheimer said, was another piece of
      evidence that markets -- and therefore the large groups of people who
      invest in them -- are not the rationally-functioning entities that
      some experts believe them to be.

      "This is not the only factor that plays a role in stock performance,"
      he said. "A number of other economic and psychological factors
      undoubtedly play a role as well. This study does not argue that
      psychology is more important than economics, but rather that one
      cannot ignore psychological variables when constructing models of
      stock performance."


      The research was funded by the National Science Foundation.

      CONTACT: Oppenheimer, (609) 258-7465, doppenhe@...


      Predicting Short-Term Stock Fluctuations by Using Processing Fluency
      Adam L. Alter and Daniel M. Oppenheimer
      Three studies investigated the impact of the psychological principle
      of fluency -- that people tend to prefer easily processed information
      -- on short term share price movements. In both a laboratory study
      and an analysis of naturalistic real world stock market data,
      fluently named stocks robustly outperformed stocks with disfluent
      names in the short term. For example, in one study, an initial
      investment of $1000 yielded a profit of $112 more after one day of
      trading for a basket of fluently named shares than for a basket of
      disfluently named shares. These results imply that simple, cognitive
      approaches to modeling human behavior sometimes outperform more
      typical, complex alternatives.
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