Secret knowledge of stock tickers

Among the 20 companies that entered the New York Stock Exchange between October and November 2013, there were the following eight organizations: OCI Partners, Springleaf Holdings, Brixmor Property Group, Essent Group, 58.com, Mavenir Systems, Midcoast Energy Partners and twitter. Among these firms are technology, energy, financial and real estate companies whose initial public offering was valued at between $ 60 million (Mavenir Systems) and $ 24.5 billion (Twitter).

By the end of the first trading day, Midcoast, Springleaf, 58.com, and OCI were up, while Essent, Brixmor, Mavenir, and Twitter were down. At first, it is quite difficult to distinguish companies that, after an IPO, will increase in price from those that, on the contrary, lose in price. Many experts say that it is almost impossible to predict the behavior of stock prices at the time they enter the market.

In his classic work on investing capital “A Random Walk Down Wall Street” (1973), Princeton economist Burton Malkiel wrote the famous phrase that “a blindfolded monkey can throw darts at the financial section of a newspaper, can pick up a portfolio no worse than what the experts carefully select. ” Investors, according to Malkiel, are thrown at the mercy of the market, and although stock prices tend to rise in the long run, it is almost impossible to beat the market consistently and confidently. Incidentally, Malkiel’s book was sold in a million copies.

Short-term investment is usually a roulette game, but if you go back to the eight firms mentioned at the beginning of this article, you can distinguish one seemingly invisible line that distinguishes companies that have grown in price from those that have lost in price: those that have grown in price companies have tickers that are easy to pronounce in accordance with the rules of the English language - thus, they can be read aloud without adding unnecessary sounds, as if such words really existed. Shares of companies with pronounced tickers - OCIP, MEP, LEAF and WUBA (OCI, Midcoast, Springleaf and 58.com respectively) grew by 5-15%, while hard-to-pronounce in English ESNT, BRX, MVNR and TWTR (Essent , Brixmor, Mavenir, and Twitter) fell in price between 0.5-14%.

Eight companies are a representative sample in all respects, and stock prices are influenced by much more powerful forces - however, the relationship between the pronunciation of the ticker and the behavior of the stock at the time of its entry into the market persists in the case of a larger sample. (The trend does not change if you look at the tickers of all 23 companies that entered the IPO from October to November: after spending 24 hours on the stock markets, 75% of companies with pronounced tickers increased in price, while among companies with difficult to pronounce only 47% of firms noted an increase in stock prices by tickers).

A few years ago, Daniel Oppenheimer and I exploredthe behavior of about 1,000 stocks that began to be traded on the New York Stock Exchange and the American Stock Exchange between 1990 and 2004. We divided stocks with pronounced and unpronounceable tickers. In both markets, stocks with pronounced tickers showed higher performance immediately after entering an IPO.

The effect was especially strong in the first few days of trading, with time it waned, but never completely disappeared. A trader who invested a thousand dollars in companies with pronounced tickers could make $ 85 more than anyone who invested in companies with unpronounceable tickers. (We were convinced that these results were not obtained under the influence of external factors, such as the foreign origin of companies with pronounced or unpronounceable tickers, their size or type of industry). These results alone came as a surprise, but we also found that companies with simpler names (such as NOVA Corporation) performed better than companies with complex names (like Magyar Telekom Távközlési Részvénytársaság). Other researchers on this issue have cometo similar conclusions .

Why do investors, many of whom so carefully analyze huge volumes of information to understand the financial condition of companies, base their decisions, including on how the stock ticker of a particular stock looks like? The answer is that pronouncing “convenient” tickers is somewhat easier in terms of mental costs, and people tend to prefer objects and processes that are relatively easy to read or easy to implement.

The same logic also explains why we like people with simpler names more and why the aphorism “patience and labor will rub everything” sounds more convincingthan "patience and work will succeed." In both cases, an easier-to-read concept seems closer, safer and more reliable - and the same is true for stocks or, more precisely, for economic decisions. Only a few investors admit that they choose stocks based on the sound of their tickers - such perceptual characteristics are fixed precisely because they act subconsciously.

A similar effect also explains why some forms of currency seem more valuable than others. In one experiment, we interviewed dozens of adultsand asked them to indicate what things they could buy for one dollar: how many would there be stationery buttons, bundles of Skittles, sheets of wrapping paper or paper clips. The survey participants wrote the answers on paper with an image of either a standard one-dollar banknote or a relatively rare coin , also with a face value of one dollar. Like complex names, a rare currency is hard to read because it is unfamiliar to people. Those who had a dollar bill in front of their eyes considered that they could purchase an average of 18% more goods than those who looked at the coin. We also revealed a correlation between how often a person came across a coin and how he evaluated its purchasing power - the more familiar the dollar coin was to him, the higher was its value to the respondent.

Of course, people perceive coins and banknotes differently, so we conducted another study, which was designed to more accurately record the difference in this kind of perception. In this case, we asked the respondents the same task, but at the same time showed images of the following banknotes:





Most people will realize in a second that the first banknote is real, and the second is fake. However, despite the fact that there were 6 differences between banknotes, not one of the respondents who were shown a fake dollar understood that it was a fake. (There is a similar taskwith real pennies and 11 fakes, which shows how poorly we remember the details of even very familiar objects). And yet, those who saw the real dollar rated its purchasing power almost twice as high as those who saw the fake. An unfamiliar form of currency — even if you don’t know for sure that it is unfamiliar to you — seems less valuable.

What does this speak in practice? For consumers and investors, this means staying on guard: outward simplicity can make you spend or invest more than you need. It is important for entrepreneurs that, ceteris paribus, a simpler name is more profitable than a more complex one. Novelty, uniqueness and zest in some cases are advantages, but for the financial world these are most often disadvantages.

If you choose a stock ticker for an IPO company, there is nothing wrong with trusting a monkey throwing darts at a board with a list of abbreviations - as long as there are more symbols like WUBA, OCIP and LEAF in it than names like BRX , SRLP or MVNR.

About the Author: Adam Elter, author of Drunk Tank Pink: And Other Unexpected Forces That Shape How We Think, Feel, and Behave , and associate professor at the Department of Marketing at New York University's Stern School of Business, also working at the faculty Psychology, New York University. Some of the ideas presented in this article are presented in modified form in Drunk Tank Pink.

Photo: Mary Elteffer