In Case You Believe Markets Are Efficient

Today in the Financial Times, John Authers provides a tidy example of investor irrationality:

Why do some stocks do better than others? There can be many reasons but one, it appears, could be a change to a new and catchier ticker symbol.

On August 24, Sun Microsystems announced that it was changing its ticker from SUNW to JAVA – a catchy name that ties in with its history of developing Java technology.

Since then, it has outperformed the S&P 500 by more than 15 per cent and has also strongly outperformed the tech sector.

There are other examples. Since August of last year, Big Lots, the discount retailer, is up more than 60 per cent – far in excess of the market. Over the previous decade, its stock had declined: but then it changed its ticker from BLI to BIG.

Academic research confirms that there is a pattern. A study of flotations on the New York Stock Exchange by Adam Alter and Daniel Oppenheimer, of Princeton University, shows that stocks whose tickers could be pronounced as a word beat stocks with unpronounceable tickers for up to a year after flotation, by a small but statistically significant margin….

None of this is surprising to followers of behavioural finance, which substitutes psychological insights for economists’ assumption that people are rational. When bombarded with complex information, it is human nature to look for short cuts. This, in turn, offers the opportunity for profit.

As Richard Thaler, the University of Chicago academic now regarded as a founder of behavioural finance, once put it: “People are not blithering idiots but they are a long way from hyperrational automatons.”