Filed under: Investing
There is a mountain of evidence that investors react emotionally, not rationally, when it comes to placing their money. Add to the pile a new study that suggests people literally choose stocks at the top of an alphabetical list because they don’t want to spend the time considering that stocks further down might be a smarter buy.
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The study comes from researchers at Seton Hall University and Yeshiva University. Realizing that few people have the time or inclination to go through the masses of quantitative and qualitative information on a given company, and that stock lists are usually assembled in alphabetical order, the trio wondered whether people focus on the companies that are high up in the listings, giving up as they go further down.
If investors did, there should be evidence from trading volumes and firm value. That’s what the researchers looked at. The difference isn’t huge, but it’s there.
Blame the Internet
The year 1999 is a demarcation point. Before then, there was no difference in the trading volume based on alphabetical order. After, stocks in the early part of the alphabet began trading at 1.7 percent higher volume than those at the end. Furthermore, the average market-to-book ratio of a company early in the alphabet is 6.1 percent greater than one toward the end.
The researchers say the reason is the Internet. Rather than getting suggestions from brokers, many people began to trade and research online. Investor websites let consumers choose a group of stocks based on a given set of criteria — the example the research gave was market capitalization of $1 billion and stock price below $50 a share. But after that, the lists are in alphabetical order.
Additional, investors get PDFs or paper lists of stock summaries from brokers and research firms. Those lists can’t be reordered.
According to the researchers, people get overwhelmed with all the information they could consider, so many stop earlier rather than later in the lists, having found enough that will satisfy their criteria, even though there might be better choices last in the alphabetic lists.
Time spoke with Jesse Itzkowitz, a marketing professor at Yeshiva University and one of the co-authors. “Back when people used phone books, they were more likely to choose companies with names like ‘AAA Avocados’ or ‘Acme Pest Control’ than those later in the alphabet,” he said.
That’s right, the Internet has put many investors back into the age of the Yellow Pages. So much for the progress of technology.
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Source: Investing
