Tuesday, September 22, 2009

Drilling Down - Perceiving the Risk of Stock Picking - NYTimes.com

Drilling Down - Perceiving the Risk of Stock Picking - NYTimes.com:
"Consider a stock that picks up 10 cents on even days of the month and loses that much on odd days. Now imagine, instead, a stock that picks up value until the midpoint of the month, and then sinks until the endpoint. Both stocks offer the same monthly and yearly return. But investors will tend to regard the first stock as safer than the second, according to a paper soon to be published in The Journal of Consumer Research. The researchers found an essentially irrational buyer response to “run length,” meaning the height and depth of a stock’s spikes, unrelated to the frequency with which the stock varies, the period of time over which the investment is contemplated, the stock’s returns over a given period or its average value."

1 comment:

Anonymous said...

I dont know why this is such a big surprise. In HINDSIGHT, the returns are equal, but when you are watching the charts in real time, a run of negative returns for two weeks in a row is hard on the nerves. You have no way of knowing in real time that the stock will recover. It is comforting (affirming) when the stock recovers frequently.