Can the way stock information is presented lead investors to make the wrong
decisions? A new study in the Journal of Consumer Research shows that when
investors use charts, they are likely to make a baseless decision about the
riskiness of a stock based on its run-length.
Stock graphs are everywhere, available on financial and public websites to be
loaded and customized by users. Authors Priya Raghubir (New York University)
and Sanjiv R. Das (Santa Clara University) found that investors believe that
stocks with shorter up-and-down movements are less risky than those with longer
run-length. This is called the “run-length” effect.
They tested three groups — affluent Californians, undergraduates, and general
investors — and found that all three judged a stock with a shorter run-length more
favorably. They found that the run-length effect increases with greater education
and frequency, length, and diversity of trading experience.
They conclude that because of the large amount of data presented on a graph,
investors simplify their task by sampling points from a financial instrument’s
price history to estimate trend and noise. The sampling strategy leads to
perceptual biases when the sample points are not representative of the price
The authors believe there are public policy implications that might lead to how
data is presented because “systematic biases in risk perceptions may permeate the
market uniformly, resulting in persistent biases in prices. . . From a consumer
perspective, individual investors should be made aware of their biases in
appraising and comparing stocks using charts.”
“These results have implications for how financial information is communicated
to investors,” the authors write. The visual display of stock information has
increased and the number of commercial purveyors of stock analysis information
has mushroomed?From a public policy perspective, regulators should consider
imposing guidelines about how financial information is presented to individuals,
akin to mandatory labeling by the Food and Drug Administration (FDA).
Priya Raghubir and Sanjiv R. Das. ” The Long and Short of It: Why Are Stocks
with Shorter Runs Preferred?” Journal of Consumer Research: April 2010
(published online September 17, 2009).