One study found that returns are lower around full moons, with the magnitude of the difference being 3-5 per cent per year. Illustration: iStock
Superstitious types will know Friday 13th is just days away. Scientifically minded folks might be inclined to roll their eyes, but this may be premature – after all, if enough investors share a silly belief, stock market prices can become distorted.
But do popular superstitions affect the stock markets? Let’s see what the research says.
Friday the 13th
An estimated one in 10 Americans fears Friday the 13th. Globally, 85 per cent of buildings don’t feature a named 13th floor (90 per cent in the US). Experimental studies show people become much more risk-averse in their choices after thinking about Friday the 13th, while one 2005 study found a reluctance to do business on the day results in a typical loss for the US economy of $800 billion-$900 billion. Does this fear affect stock market prices? Yes, according to a 1987 study that found significantly lower US returns on Friday 13th compared with other dates, although this was contradicted by later research. One study, for example, said that while Friday 13th returns were negative, they were actually better than those recorded on other Fridays, while another paper found the results were distorted by a separate calendar anomaly. In fact, international returns have actually been higher than normal on Friday the 13th, according to Prof Brian Lucey of Trinity College Dublin, who examined data pertaining to 19 national stock markets over the 1988-2000 period.
A different take is offered by Swedish finance professor Jarkko Peltomaki. Superstitious investors, he argued, are more likely to sell in advance of the day, on Thursday 12th. Accordingly, prices should rebound higher near the close of trading on Friday 13th, once it becomes clear nothing unpleasant has occurred. According to Peltomaki, this pattern was common until 1980, but has since disappeared. Why? Irrational investors appear to be losing their influence, with automated trading gradually erasing the Friday 13th effect.
The Chinese word for the number eight sounds like the word for prosperity, while the number four sounds like the word for death. Many Chinese perceive the former as lucky, the latter unlucky. That’s why Bank of China opened its Hong Kong office on August 8th, 1988; why the Beijing Olympics began at 8.08pm on August 8th, 2008; why China’s tallest skyscraper is 88 floors high; and it’s the reason why a group of Chinese investors last year bought a Sydney skyscraper for $88,888,888.
You might think that if any stock market is likely to be affected by superstitious beliefs, it’s China’s. You would be right. In China, stock exchanges designate stocks with numerical codes and investors refer to stocks by these same codes. One study, Superstition and Financial Decision Making, noted that supposedly lucky listing codes are disproportionately common. Investor interest in firms with lucky codes means they initially trade at a premium to the market; this overvaluation means they underperform over time.
Another paper, Do Superstitious Traders Lose Money?, found Taiwanese traders are more than 50 per cent more likely to place an order ending in an eight than in a four. Such behaviour is costly – the most superstitious traders, the researchers found, underperformed the least superstitious by almost 9 per cent per year. As they concluded somewhat euphemistically, superstition may be “a symptom of a general cognitive disability in making financial decisions”.
Full moons and eclipses
A full moon has long been associated with myths and superstitions. The days around a full moon are also associated with lower stock returns, according to Prof Ilia Dichev of the University of Michigan, and this effect has been “pervasive” for all US indices over the past century. It’s an international phenomenon, Dichev finding that returns have been two to three times higher during new moons in every G7 country. The Irish stock market was one of 25 countries analysed by Dichev; the full moon effect was obvious in all but one (Norway was the exception).
Another paper, Are Investors Moonstruck?, came to the same conclusion after analysing 48 countries: returns are lower around full moons, with the magnitude of the difference being 3-5 per cent per year.
Now, this apparent differential is not actually driven by superstition – researchers refer to psychological and biological literature suggesting the lunar cycle can influence people’s moods. However, the question of superstition was the explicit theme of Dark Omens in the Sky: Do Superstitious Beliefs Affect Investment Decisions? Noting that solar and lunar eclipses are associated with negative superstitious beliefs in Asian and western societies, Prof Gabriele Lepori examined returns around 362 such events over the period 1928-2008. Below-average returns and lower trading volumes were evident, especially when eclipses drew wide media coverage and public attention. This “apparently irrational behaviour” means the day after an eclipse is a buying opportunity for informed traders, the end result being a quick price rebound.
A breeding ground?
“Psychological research documents that individuals are more likely to resort to superstitious practices when operating in environments dominated by uncertainty, high stakes, and perceived lack of control over the outcomes”, concluded Prof Lepori’s paper on eclipses. Accordingly, the stock market “represents an ideal breeding ground for superstition”.
Anecdotal evidence bears out this contention. In the 1920s famed American banker JP Morgan was rumoured to have sought the advice of astrologers. In his memoir, former chairman of the Chicago Mercantile Exchange Leo Melamed wrote that “most traders, whether they admit it or not, are superstitious”. Some have a lucky tie or pencil; some drive to work down the same streets; Melamed even knew of a trader who had “lucky underwear that had to be washed every night” so he could wear it the next morning. This was echoed by former trader Caitlin Zaloom in her book Out of the Pits, Zaloom referring to talismans, magical beliefs and how many traders “obsess over keeping all conditions exactly the same”.
One such magical belief is the so-called “maiden in the volcano” trade, noted Reformed broker blogger Josh Brown in an old blog post. During heavy sell-offs, said Brown, many investors “believe that they have to blow out one position to appease the market gods, tossing a maiden into the volcano so that the island will be spared the wrath.” In Confessions of a Street Addict, CNBC presenter and former hedge fund manager Jim Cramer referred to the strategy.
“In 1995 I had broken a horrendous streak by taking Altera, then my biggest position, and throwing her into the volcano as an ultimate sacrifice”, wrote Cramer. “It worked and we traded positive to the market for pretty much the next two months. In 1997 I took Cascade, long a favourite, and sacrificed it to the gods, breaking a four-week tailspin”. Disappointingly, “not even the maiden in the volcano worked” in 1998, Cramer referring to how he had “thrown a half-dozen maidens in the volcano”, to “no avail whatsoever”.
Such thinking is “as primitive as you get”, noted Brown, but it feels good when it works. “If this happens once or twice, logic aside, you will swear by it.”