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March 31, 2015 at 08:52 AM
“Imagine your favorite soccer team is up three-zero at half time, but the match finally ends in a draw,” said Stefan Zeisberger, assistant professor in the College of Business at New York’s Stony Brook University. “You’re probably pretty disappointed because you expected your team to win.”
However, Zeisberger said, “if your team was down three-zero at half time and recovered in the second half of the match, but still ended up with a draw. Depending on the irrelevant state of where your team stands at half time, your happiness as a fan is totally different for the same end result.”
When it comes to financial markets, investors react in exactly the same way as sports fans. They are happiest if their assets first fall in value and then recover, Zeisberger said, and least happy with the opposite pattern, even when the final return is exactly the same.
Zeisberger is the co-author of a brand new behavioral finance study entitled “All’s Well that Ends Well? On the Importance of How Returns are Achieved” and director of Stony Brook’s Center for Behavioral Finance. He is also an associate at Behavioural Finance Solutions (BhFS) in Zurich, an organization that consults with banks and insurance companies to incorporate insights from behavioral finance into their services, products and business processes.
Zeisberger’s study is centered around three characteristic stock price developments: One in which the price path followed a monotonic, one-directional trend; another where the price first decreased but then recovered; and a third where the price went up first and then down. Each price path was combined with an overall return of 10% and with a 10% drop, thereby giving six overall stock price paths.
