Predicting short-term stock fluctuations by using processing fluency

Abstract

Three studies investigated the impact of the psychological principle of fluency (that people tend to prefer easily processed information) on short-term share price movements. In both a laboratory study and two analyses of naturalistic real-world stock market data, fluently named stocks robustly outperformed stocks with disfluent names in the short term. For example, in one study, an initial investment of 1,000 US dollars yielded a profit of 112 US dollars more after 1 day of trading for a basket of fluently named shares than for a basket of disfluently named shares. These results imply that simple, cognitive approaches to modeling human behavior sometimes outperform more typical, complex alternatives.

Fig. 1.

Actual performance of shares with pronounceable and unpronounceable ticker codes in the NYSE 1 day, 1 week, 6 months, and 1 year after entry into the market from 1990–2004. Although the difference in performance between the pronounceable and unpronounceable stocks was not significant beyond 1 day, the trend persists at 1 week, 6 months, and 1 year. Although the effect size associated with this pronounceability effect is small, the practical consequences, given the amount of money invested in the NYSE, are considerable.

Fig. 2.

Actual performance of shares with pronounceable and unpronounceable ticker codes in the AMEX market 1 day, 1 week, 6 months, and 1 year after entry into the market, from 1990–2004. Although the trend appears to continue beyond one day of trading, the small sample size of shares in the AMEX (n = 116) meant that the probability of detecting a significant effect, assuming one existed, ranged between 6% and 24%. Thus, with a larger sample size, we might have expected the discrepancy in performance between the pronounceable and unpronounceable stocks to maintain significance beyond 1 day of trading.