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Be Careful Not to Let Biases Impact Your Decisions

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Investor-Update

There is a new study about superstitions and portfolio returns. It should not surprise you to hear that superstitious individual investors have worse performance than those who are not superstitious. Any time biases are introduced into financial decision making, returns will be affected.

The study looked specifically at Taiwanese traders. The researchers found a far higher ratio of orders placed at prices ending in the number eight than they did for orders ending in the number four. This was attributed to the fact that Chinese culture views the number “8” as lucky and the number “4” as unlucky. The researchers noted that in Mandarin, “four” is pronounced similar to “death,” whereas “eight” is pronounced similar to “good fortune.”

Traders who were the most superstitious trailed investors who were the least superstitious on an intraday, one-day and five-day basis. The reason is simple. The superstitious traders let their biases toward certain numbers govern their investing decisions, rather than making purely objective choices.

The study’s authors pulled no punches when discussing the results. They called superstitions “a separate dimension of an investor’s cognitive disability in making financial decisions.”

It’s not fair to solely call out Taiwanese traders for being superstitious. A bias toward or against certain numbers exists in many cultures and religions. Here, in the United States, 13 is viewed as an unlucky number. Some buildings go so far as to rename their 13th floors to avoid having it as an option on elevators, including our own office building. Conversely, 13 is a lucky number in many other countries, as is three. It is not uncommon for a Jewish person to give monetary gifts or make donations in multiples of 18. Based on anecdotal evidence, it seems fairly common for people to use birthdates when choosing lottery ticket numbers.

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