Superstition and Financial Decision Making
by Jian Ming
Psychological Biases, Superstition and Luckiness
A rich body of evidence from behavioral finance suggests that psychological biases affect firm behavior and stock prices, and that firms cater to investor misconceptions.
Unlike psychological biases, superstition beliefs are arbitrary and culture specific. While one culture views the number 8 as lucky, or 13 as unlucky, another does not. A general psychological predisposition to being superstitious does not force individuals or societies to adopt universally the notion that 13 is an unlucky number.
Superstitious beliefs related to luck are particularly popular. Throughout history, people believe that certain rituals, objects, and symbols can be used to influence their luck. For example, Chinese emperors regularly held costly and time-consuming ceremonies to pray for rain. Ancient cultures relied on omens to divine the wills of the gods. In ancient Rome, important political decisions, such as the appointment and inauguration of any magistrate and the advancement of any military campaign, required a positive result from taking the auspices.
Even in modern times, many people believe in luck and take steps to improve it. Professional athletes and stock traders often wear lucky articles of clothing, keep lucky objects, or follow luck-inducing rituals.
Such belief is not uncommon in the financial world. One astrology-based commodity trading system promised to “put the power of the universe behind your trades”. The popularity of technical trading systems may arise in part from superstitious faith in the power of numerical patterns.
Superstition in the Chinese Context
In Chinese numerology, the numbers 6, 8, and 9 are lucky because they sound similar to words that have positive meanings such as ‘prosper’ and ‘longevity’, while 4 is unlucky because in Chinese it sounds similar to the word ‘death’.
For this reason, empirical evidence suggests that consumer product advertisements in China disproportionately include 8 and exclude 4. Taiwanese consumers are willing to pay more for a pack of eight tennis balls than 10. Anecdotal evidence also abounds that numerological beliefs are influential in China. For example, the opening ceremony of the Beijing 2008 Summer Olympic Games officially started at 8:08 pm on August 8, 2008.
Stock exchanges in China designate stocks with numerical codes and investors typically refer to those stocks by the codes. For example, The Bank of China’s listing code on the Shanghai Exchange is 601988, which contains the lucky numbers 6, 8, and 9.
Popular press suggests that lucky numbers play a role in investors’ decisions in China. In the May 24, 2007 edition of Wall Street Journal Asia, a Chinese investor was quoted as saying: “I believe good codes will bring good luck.” He attributed the good performance of a stock he bought to the two 8s in its numerical code (600881).
Superstition and the China IPO market
The IPO market can be particularly subject to superstition effects because:
• IPO values are especially volatile and uncertain;
• concrete objective information upon which to base valuations tends to be lacking; and
• individual investors (who are expected to be especially prone to superstition) participate heavily in the market.
In a joint paper with Prof David Hirshleifer from University of California, Irvine and Prof Huai Zhang from Nanyang Business School, we examined 1,384 newly listed firms in China from 1991 through 2005. We found evidence that investors did generally prefer listings with lucky numbers. Along with that, we found that managers of IPO firms were keen to capitalize on this preference.
We showed that an abnormally high proportion of firms with lucky listing codes and an abnormally low proportion of firms with unlucky listing codes. As it turns out, large firms were more likely to obtain lucky numbers. On the Shenzhen Stock Exchange, the proportion of firms with lucky listing codes is 22 per cent more than expected by chance. Conversely, unlucky listing codes occurred 17 per cent less often than expected. This is consistent with firms purposefully attempting to obtain numerical codes with lucky numbers during the IPO process. The firms seem, however, content to settle for less auspicious phone and fax numbers, suggesting that managers themselves do not hold strong convictions about lucky numbers.
In terms of firm valuation, the results suggested that firm value (measured by either Tobin’s q or the equity market-to-book ratio) is significantly higher for newly listed firms with lucky numbers than for those with unlucky numbers, after controlling for known determinants of firms’ valuation ratios. Specifically, q is 23 per cent higher for firms with lucky listing codes than for firms with unlucky listing codes, a difference that is both statistically and economically significant.
Moreover, three-year post-IPO returns are significantly lower for firms with lucky listing codes than for firms with unlucky listing codes, relatively underperforming by about 6 per cent per year. This suggests that over time, the lucky number premium is eroded as real information about the firm and its performance becomes available. This supports the premise that economic decision makers are subject to superstitious behaviour.
Our findings within this more restricted domain of superstition indicate that investor ideas do matter in affecting market (mis)pricing and long-term return. Investors have to be mindful that investments based purely on superstitious belief on average do not generate good results.
More broadly, while cognitive biases tend to operate fairly consistent across cultures, arbitrary ideas such as superstitious belief can cause errors that vary greatly over time and are completely different across cultures. For instance, some argue that phenomena such as the dot.com boom and the rise of diversified investing over a period of decades are (errors) caused by the spread of arbitrary ideas or ‘popular models’ about investing. It will be interesting to see in domains other than superstition how arbitrary ideas affect capital markets and firm behaviour.
Associate Professor Jian Ming conducts research at NTU's Nanyang Business School on financial reporting, corporate finance and governance in emerging markets, especially China.
Published in The Business Times on 1 July 2014. This is part of an ongoing series View from an NTU professor.