ABCs of Trading: Behavioral Biases Affect Stock Turnover and Value

Abstract

Psychological research suggests that individuals are satisficiers. That is, when confronted with a large number of options, individuals often choose the first acceptable option, rather than the best possible option (Simon 1957). Given the vast quantity of information available and the widespread convention of listing stocks in alphabetical order, we conjecture that investors are more likely to buy and sell stocks with early alphabet names. Consistent with this view, we find that early alphabet stocks are traded more frequently than later alphabet stocks and that alphabeticity also affects firm value. We also document how these effects have changed over time.

Keywords: Alphabetical Order, Heuristics, Stock Turnover, Behavioral Finance, Company Name

JEL Classification: G11, G12