Blowing Bubbles: Heuristics and Biases in the Run-Up of Stock Prices

Journal of the Academy of Marketing Science, Vol. 33, No. 4, pp. 486-503, 2005

18 Pages Posted: 23 May 2006

See all articles by Joseph Johnson

Joseph Johnson

University of Miami - Department of Marketing

Gerard J. Tellis

University of Southern California - Marshall School of Business, Department of Marketing

Abstract

Ads of stocks and mutual funds typically tout their past performance, despite a disclosure that past performance does not guarantee future returns. Are consumers motivated to buy or sell based on past performance of assets? More generally, do consumers (wrongly) use sequential information about past performance of assets to make suboptimal decisions? Use of this heuristic leads to two well-known biases: the hot hand and the gambler's fallacy. This study proposes a theory of hype that integrates these two biases; that a positive run could inflate prices, while a negative run could depress them, although the pattern could reverse on extended runs. Tests on two experiments and one event study of stock purchases strongly suggest that consumers dump "losers" and buy "winners." The latter phenomenon could lead to hyped-up prices on the stock market for winning stocks. The authors discuss the managerial, public policy, and research implications of the results.

Keywords: heuristics and biases, financial products, behavioral decision theory, judgment and decision making

Suggested Citation

Johnson, Joseph and Tellis, Gerard J., Blowing Bubbles: Heuristics and Biases in the Run-Up of Stock Prices. Journal of the Academy of Marketing Science, Vol. 33, No. 4, pp. 486-503, 2005. Available at SSRN: https://ssrn.com/abstract=903874

Joseph Johnson (Contact Author)

University of Miami - Department of Marketing ( email )

United States

Gerard J. Tellis

University of Southern California - Marshall School of Business, Department of Marketing ( email )

Hoffman Hall 701
Los Angeles, CA 90089-0443
United States
213-740-5031 (Phone)
213-740-7828 (Fax)

HOME PAGE: http://gtellis.net

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