I love to discover new ways of thinking about things. This is one of the reasons I like reading about the latest research in any of the many subject areas in which I have an interest.

Flickr photo by Tripp

Stock Market

An example is the study I recently read about in Shankar Vedantam’s book, The Hidden Brain. It had to do with companies that were newly listed on stock exchanges.

Economists sometimes study how people make decisions about which stocks to invest in. Generally with established companies there is a lot of information available, but what about the new issues of stock, and especially for those companies that are not well-known? Psychologists Adam Alter and Daniel Oppenheimer looked not at earning reports or headlines or any of the usual things that might be considered in choosing to buy a stock. They looked at how easily the names of the companies could be pronounced. Vedantam writes;

“Alter and Oppenheimer tracked ten stocks with easy-to-pronounce names and ten stocks with hard-to-pronounce names on the New York Stock Exchange. They found that companies with easy-to-pronounce names outperformed companies with hard-to-pronounce names by 11.2% on their very first day of trading. After six months the difference was more than 33 percent. If you’d put a million dollars into the stocks with easy names and a million dollars into the stocks with hard names, the group with easy names would have outperformed the group with difficult names by $330,000.”

It was also found that easy-to-pronounce stock ticker symbols led to higher price appreciation.

Apart from suggesting a new investing strategy, this research also suggests (or reminds us) that we are not nearly as rational as we like to imagine. Of course, few investors would ever say they are buying a stock because of the simplicity of the name, nor would they even think that way consciously. It is an unconscious bias which is at work here.

This was fascinating because I have an interest in stock markets. I’m also very interested in how unconscious bias can affect our thinking. But there is another element, which is the fact that these researchers were finding new ways of thinking about a subject. It makes me wonder what other experiments are waiting to be done, and what they might reveal if we can just dream up the new hypotheses necessary–if we can just think about things in new ways. It is particularly exciting for those of us who do not have the position nor money to do expensive experiments in a lab. This research could have been done for free using stock price quotes available online or in a newspaper.