Stock performance tied to ease of pronouncing company's name
- 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
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
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
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.