Small percentage differences account for big money when it comes to the stock market. As a psychology writer and part-time trader, I was delighted to discover work by Psychologists Adam Alter and Daniel Oppenheimer that suggested there was a natural inclination to overvalue companies with easy-to-pronounce names and undervalue those with difficult-to-pronounce names. Logical? Absolutely not, but relevant just the same.
Recognizing that people tended to respond positively to words that are easy-to-pronounce and process, Alter and Oppenheimer decided to see if this preference lent it self to picking stocks - i.e. would people prefer stocks with simpler names over those with complex names?
In their first study they presented groups of volunteers with a series of made-up company names - some difficult to get your tongue around - like Xagibdan and Beaulieaux and some easy-to pronounce, like Barnings and Tanley. They asked the group to estimate the future performance of these stocks. They found that participants tended to overvalue companies with easy names and undervalue companies with difficult names.
In a separate study, the researchers tracked ten stocks with easy-to-pronounce names and ten stocks with hard-to-pronounce names on the New York Stock Exchange. These 20 stocks were new to the NYSE and performance was tracked the first day on the Exchange, then after 1 week, after six months and after 1 year. They found that companies with easy-to-pronounce names outperformed companies with hard-to-pronounce names by 11.2 percent on their first day of trading. After six months, the difference was more than 27 percent. After a year, it was more than 33 percent!
In a third study, Alter and Oppenheimer looked at ticker symbols and found the same thing there, although over the longer term the payoff was less. Companies with easy -to-pronounce symbols (such as KAR) outperformed companies with hard-to-pronounce symbols (such as RDO) by 8.5% on their first day of trading and 2 percent after one year of trading. 2 percent may not sound significant, but in the world of trading, 2 percent is big money.