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Are consumers receiving the information they need to choose stocks?

University of Chicago Press Journals

Do shooters in basketball games really get hot hands? Is it truly a good idea to buy more lottery tickets this week if you won last week? In each of these cases, an aberration from the overall trend--the hot hand for a game or a winning ticket--threatens to make people victims of the gambler's fallacy, or the idea that a hot hand might continue from game to game or table to table when, statistically speaking, it won't.

A new study in the September 2005 issue of the Journal of Consumer Research shows that this gambler's mindset affects a consumer's approach to the stock market--a potentially problematic application.

"When applied to a stock market context, a consistent finding is that consumers prefer to buy past winners and sell past losers even when neither should be preferred. This behavior violates the normative rule of buy low and sell high," contend Joseph Johnson (University of Miami) and colleagues.

Of importance, explain the researchers, is that this human predisposition for rolling the dice may make it easier to negatively take advantage of consumers. They note that it's not uncommon to see advertising for "winning" stocks even though there is no predictable reason why a stock's upward trend will continue.

They argue that "even when such trends do not predict the future and such ads must carry the SEC disclosure to such an effect. The advertisers rightly suspect that consumers use such information to make buy decisions. Thus, the SEC needs to investigate whether the current disclosure serves any useful purpose and what alternative form it should take."

In a broader sense, this research may serve to illustrate how consumers respond to products and drive trends in the marketplace. The authors conclude that "if generalizable, [the results] may explain the hype that surrounds the rapid growth of new products, the escalation in real estate prices in a hot market, and the rise of fads."


Losers, Winners, and Biased Trades. Joseph Johnson, Gerard J. Tellis, and Deborah J. Macinnis. Journal of Consumer Research. September 2005.

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