Superstition and Financial Decision Making

What is it about?

In Chinese culture, certain digits are lucky and others unlucky. We test whether such superstition affects the financial decisions of firms going public in the China and investors in these firms. We find that firms selling stock to public investors for the first time have lucky listing codes---codes that contain lucky digits---more often than can be explained by chance. Furthermore, investors seem to overvalue firms with lucky listing codes, resulting in later disappointment. We find that firms with lucky listing codes later experience inferior stock return performance.

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Why is it important?

The behavioral finance field studies how psychological bias affects financial decisions and outcomes. Most research in this field studies general biases that would affect judgments about gambles based on how likely different outcomes are or based on how the gambles are presented to investors. However, in reality an important source of bias is that people have mistaken theories about how the world works. Superstitious belief in lucky numbers is one example of such a mistaken theory. So this study opens a window into understanding how the adoption of mistaken world views affects financial markets.

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