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Stock characteristics, trading behavior, and psychological pitfalls

Chih-Hsiang Chang, Hsu-Huei Huang, Ying-Chih Chang and Tsai-Yin Lin

Managerial Finance, 2015, vol. 41, issue 12, 1298-1317

Abstract: Purpose - – The purpose of this paper is to investigate how stock characteristics influence investor trading behavior and psychological pitfalls. Design/methodology/approach - – This study employs the methods of Solt and Statman (1989) and Kumar (2009) to examine investor trading activities. Findings - – Good companies do not usually have good stocks, while lottery-type stocks show better price performance than other stocks. Due to the representativeness and affect heuristics, the stocks of good companies are frequently transacted, while the low-priced stocks are infrequently transacted. Moreover, investors may display the gambler’s fallacy in the trade of stocks of good companies and the overconfidence and self-attribution bias in the trade of lottery-type stocks. Research limitations/implications - – Investors trading lottery-type stocks demonstrate greater maturity than those that trade stocks of good companies; however, psychological pitfalls still dominate investor trading behavior. Practical implications - – The representativeness heuristic of “stocks of good companies are good stocks” results in the inclusion of stocks of good companies in a portfolio and poorer price performance, whereas the inclusion of lottery-type stocks in a portfolio brings higher returns within a short period of time. Originality/value - – Compared to earlier studies that focussed on the price performance of stocks of good companies and investor trading behavior in relation to lottery-type stocks, this study aims to investigate the influence of stock characteristics on price performance, trading activities, and psychological pitfalls.

Keywords: Behavioral finance; Overconfidence; Heuristics; Stock characteristics; Gambler’s fallacy; Self-attribution bias (search for similar items in EconPapers)
Date: 2015
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