For instance, how do you decide what cereal to buy? or what team to root for? or what stock to buy?
Atler and Oppenheimer (psychologists) contribute to this investigation with a paper that investigates whether the pronunciation of a stock symbol impacts the returns. They report that the pronunciation does matter.
"The ease of pronouncing the name of a company and its stock ticker symbol influences how well that stock performs in the days immediately after its initial public offering"Why? Good question. It could be that information costs are lower for easy to remember firms, it could be that easy to pronounce symbols are given to "better" firms, or it could be that investors make decisions in a manner that traditional financial economists would call "irrational".
First the press release from Princeton (the paper is available for $10 from NSF):
"A new study of initial public offerings (IPOs) on two major American stock exchanges shows that people are more likely to purchase newly offered stocks that have easily pronounced names than those that do not, according to Princeton's Adam Alter and Danny Oppenheimer..."This idea came from a classroom experiment:
"The two researchers were initially looking for a different effect when they stumbled upon the relationship between ease of pronounceability and performance. They asked a group of students to estimate how well a series of fabricated stocks would perform based only on the stocks' names.Interesting to say the least. But I do have some questions and am looking forward to reading the actual paper! (Via a free interlibrary loan, not $10).
"We gave them the list of company names and essentially asked, 'How well do you think the stock would perform?'" Oppenheimer said. "At the time, we were primarily interested in studying whether we could manipulate how people interpret the feeling that information is easy to process. We weren't trying to study markets or companies initially; stocks were just an interesting domain of inquiry."
However, the relationship was very strong -- regardless of Alter and Oppenheimer's attempts to manipulate students' interpretations, the students still believed that the easily pronounceable stocks would perform best."
NOTE: Several of the links I have found on this seemingly use the term stock symbol and name interchangeably. It appears the actual paper used both, which begs the question of whether there were differences. This could be important for at least a couple of reasons: if it were company name, then one might suspect that at least part of the return difference (probably better measured using Q ratios) would come from consumers being able to remember the name (hence the importance of pronunciation might be lower for firms that market to other businesses (B2B) than to consumers (B2C). If it were only because of symbols, it is possible that easy to pronounce symbols (names etc) are given away in a way that signals firm quality.
One of the best links I have seen on this is from RedHerring.
(Thanks to JB for pointing this article out and to JG for suggesting the B2B and B2C distinctions!)