A study of trading patterns in the Taiwan index futures markets has added another piece of evidence to the argument that markets are not rational—or at least, not made up of rational actors.
The prices of limit orders made on the market disproportionally tend to end with the number ‘8’, according to the paper’s four authors. Likewise, in the same five-year dataset, prices finishing in ‘4’ occurred far less frequently than normal distribution would suggest.
“The Games of the XXIX Olympiad began in Beijing on 08/08/2008 because the number ‘8’ is a lucky number in China,” wrote Indiana University’s Utpal Bhattacharya, National Chengchi University’s Weiyu Kuo, and Tse-Chun Lin, and Jing Zhao, both of the University of Hong Kong.
“In the language of Mandarin (the official language in Taiwan), the pronunciation of the number ‘4’ sounds like ‘death,’” the researchers continued. “The number ‘4’ is thus viewed as inauspicious.”
The scholars built a superstition index based on the ratio of ‘8’s to ‘4’s in the final digit of investors’ limit orders. The higher the ratio, the higher an investor scored on the index. The study examined submission and execution data for the Taiwan Futures Exchange from January 2003 to September 2008, comprising a total of 125 million qualifying trades.
“Why would superstitious investors lose money? They may not lose money if superstitious beliefs in numbers—though interesting in their own right—are orthogonal to trading prowess. Or they may lose money because their investment decisions are not based on reason.” —Authors
They found statistically—and financially—significant patterns of superstitious pricing by individual investors. Final digit prices also tended to cluster on ‘0’ and ‘5’, which is consistent with prior studies of retail pricing biases.
Notably, local and foreign institutional investors did not display these tendencies. Domestic asset owners ended order prices with “lucky number ‘8’” nearly as frequently as with the death-baiting “4”.
Stakeholders in these institutions benefited from their managers’ reason (or bravery), according to the authors. In an average trading day, retail investors in the top 20% of superstition compared to the bottom quintile realized underperformance of 10.6 basis points. Over the course of a year, seeking good fortune cost the average top-quintile trader TWD 105,341 (US$3,507) relative to peers in the least-superstitious 20%.
The researchers found that individual investors overall lost money on limit orders, while only the most luck-conscious institutions incurred occasional large drawdowns.
Zhao, Lin, Kuo, and Bhattacharya had little affection for numerology as an investment strategy.
“We find that the underperformance of superstitious individual investors occur at all price points, and not just at the lucky or unlucky numbers,” the authors concluded, “suggesting that superstition is a symptom of a general cognitive disability in making financial decisions.”
Full Article: “Do Superstitious Traders Lose Money?” by Utpal Bhattacharya, Weiyu Kuo, Tse-Chun Lin, and Jing Zhao.