Are You Feeling Lucky?
Why superstitious traders lose money.
September 10, 2014
Do you avoid walking under ladders? Or run away from black cats? Then you might want to stay away from Bay Street according to a new academic study, “Do Superstitious Traders Lose Money?” The research looks at superstition, defined as a belief that is not based on reason, and its role in investment decision making. The authors look at trading in the Taiwan Futures Exchange, zoning in on the Chinese superstition that the number 8 is lucky and the number 4 is unlucky. They then define a “superstition index” of a trader as the proportion of limit order submissions at prices ending at “8” minus the proportion of limit order submissions at prices ending at “4.”
In doing so, they find that individual investors are superstitious but institutional investors are not. Which is good news for institutions because there is a negative correlation between trading profits and the superstition index. “We find that these losses arise from bad trades at nearly all price points for a superstitious trader, not just at “8” and “4,” suggesting that superstition may be a symptom of a general cognitive disability in making financial decisions.”
Bottom line: traders who look for luck usually find the opposite.
The paper is written by Utpal Bhattacharya, Welyu Kuo, Tse-Chun Lin and Jing Zhao and you can download it here.