Podcast Center
Video Center
Webcasts
Resource Center
Events
January 29, 2016 at 10:54 AM
What’s in a name? When it comes to stocks and stock selection, quite a bit, actually, according to Jesse Itzkowitz, assistant professor of marketing at Yeshiva University in New York.
Itzkowitz and his wife, Jennifer Itzkowitz, a professor at the Seton Hall University’s Stillman School of Business, are co-authors of a recent paper on name-based behavioral biases, the term given to selecting a stock based on its name. The idea first came to them when they were wandering around their neighborhood on Manhattan’s Lower East Side and came across a store named “Triple A Avocados.”
“We were joking about how, in the days of the phone book companies would try to get prominence by picking names high up in the alphabet,” Itzkowitz said. “We later learned at a departmental meeting that the same things happens with stocks; that alphabet matters and the stocks that come earlier in the alphabet trade better than those that come later.”
Individual investors tend to pick the A, B and C stock names before any others simply because they’re right there and easy to spot, Itzkowitz said. The couple’s studies showed that the average investor does not get into exhaustive searches when picking stocks because the information about stocks is too difficult to understand.
How easy it is to pronounce a stock’s name also makes it a more attractive pick for investors and the more a company advertises, the more those efforts ensure that it stays front and center in an investor’s mind, Itzkowitz said, thereby making it a more likely stock pick.
The Itzkowitzes discovered, though, that expert investors — mutual funds and other institutions — are relatively immune to alphabetical ordering and other name-based behavioral biases.
“They tend to know what things like returns, PE ratios and so on are, and they know what kind of information to look for when making stock selections,” Itzkowitz said.
As such, the playing field between novices and expert investors, or those who have better financial knowledge, is unequal, with individual investors on the losing end. Companies, too, have caught onto the name-based bias trap, Itzkowitz said, and many use it to their advantage.
