Stock characteristics, trading behavior, and psychological pitfalls

Abstract

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.

Citation

Chang, C.-H., Huang, H.-H., Chang, Y.-C. and Lin, T.-Y. (2015), "Stock characteristics, trading behavior, and psychological pitfalls", Managerial Finance, Vol. 41 No. 12, pp. 1298-1317. https://doi.org/10.1108/MF-02-2014-0053