Financial Post Investing: Money
Irrational investor behaviour gets downright wacky
Mark Hulbert
The New York Times
392 words
3 January 2004
National Post
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National
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English
(c) 2004 National Post . All Rights Reserved.

Economic fundamentals? Technical analysis? Recent studies show most of us are letting much less weighty considerations drive our decisions.

What's in a name: Investors apparently pay much attention to mutual funds' names. Funds that change their names often receive a significant increase in inflows, even when they have not altered their investment strategies. Though this behaviour seems irrational, it's widespread, according to a study by three U.S. finance professors. Michael Cooper, P. Raghavendra Rau and Huseyin Gulen examined 296 funds that changed names by adding or deleting the words "value," "growth," "small" or "large." Most of these moniker changes were either to remove an association with a lagging investment style or create one with a popular style. The researchers found that, on average, these funds' assets were 22% greater a year after the name changes than the professors estimated they would have been.

Popularity contests: Investors prefer stocks that are in the news, even when the news is bad. Two finance professors, Brad M. Barber of the University of California at Davis and Terrance Odean of the UC Berkeley, used several criteria to identify stocks that grab the attention of individual investors on any given day. They focused on stocks mentioned in articles and ones with large daily changes in price or jumps in volume. They found that it didn't matter whether the articles were positive or negative, or whether the stocks' prices went up or down; as long as there were attention-grabbing events of any kind, investors were much more likely to buy these stocks than to sell them. This does not mean that stocks in the news always rise. Yet the net purchases by individual investors tend to mitigate the price declines of stocks that have had negative news and to exaggerate the increases of those with positive news. The professors compared the typical investor to a person standing in the middle of a street. On one corner, a crowd has gathered. On another, there is no one. The investor is likely to walk over to the crowd, regardless of the reason for the crowd's appearance. This implies that attention-grabbing stocks tend to be overvalued as a simple matter of supply and demand, the professors said.

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