Stock characteristics, trading behavior, and psychological pitfalls

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 –...

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Bibliographic Details
Published in:Managerial finance 2015-12, Vol.41 (12), p.1298-1317
Main Authors: Chang, Chih-Hsiang, Huang, Hsu-Huei, Chang, Ying-Chih, Lin, Tsai-Yin
Format: Article
Language:English
Subjects:
Accounting & Finance
Behavior
Economic models
Financial management/structure
Growth stocks
Heuristic
Investigations
Investments
Investors
Portfolio management
Rates of return
Ratios
Securities markets
Stock exchanges
Stock prices
Studies
Volatility
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Summary: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.
ISSN:0307-4358
1758-7743
DOI:10.1108/MF-02-2014-0053