Name-Based Behavioral Biases: Are Expert Investors Immune?

ABSTRACT

The market comprises investors with a broad range of expertise. As a result, investors may make decisions differently from one another. Research reveals that investors use name-based heuristics, or short-cuts, including alphabetical ordering (Itzkowitz, Itzkowitz, and Rothbort [2015]), name fluency (Anderson and Larkin [2012], Green and Jame [2013]), and name memorability (Grullon, Kanatas, and Weston [2004]) when trading stocks, resulting in irrational decisions. Because experts and novices process information differently, name-based biases may not affect all investors equally. The authors test and confirm the hypothesis that, compared to novices, expert investors are relatively immune to name-based biases.

KEYWORDS:

• Behavioral bias
• Heuristics
• Alphabet bias
• Stock turnover
• Expert

Acknowledgments

The authors would like to thank Tamar Avnet, Tony Loviscek, Ani Mathers, Kurt Rotthoff, and Brian Walkup for their helpful comments.

Funding

Jennifer Itzkowitz thanks the Seton Hall University Research Council for summer funding.

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Notes

1. For example, google.com/finance and finance.yahoo.com, supply a “stock screener” that allows investors to create a list of stocks meeting criteria predetermined by the investor. Once this list is generated, the information is presented in alphabetical order for the user to sift through.

2. Variables are constructed using the same method as Grullon, Kanatas, and Weston [2004].

3. For the sake of brevity, the tests are not shown here.

4. The coefficients and standard errors based on the Fama-MacBeth method are estimated using the Stata code associated with Petersen [2009].