Stock characteristics, trading behavior, and psychological pitfalls

Abstract

Purpose– The purpose of this paper is to investigate how stock characteristics influence investor trading behavior and psychological pitfalls.Design/methodology/approach– This study employs the methods of Solt and Statman (1989) and Kumar (2009) to examine investor trading activities.Findings– Good companies do not usually have good stocks, while lottery-type stocks show better price performance than other stocks. Due to the representativeness and affect heuristics, the stocks of good companies are frequently transacted, while the low-priced stocks are infrequently transacted. Moreover, investors may display the gambler’s fallacy in the trade of stocks of good companies and the overconfidence and self-attribution bias in the trade of lottery-type stocks.Research limitations/implications– Investors trading lottery-type stocks demonstrate greater maturity than those that trade stocks of good companies; however, psychological pitfalls still dominate investor trading behavior.Practical implications– The representativeness heuristic of “stocks of good companies are good stocks” results in the inclusion of stocks of good companies in a portfolio and poorer price performance, whereas the inclusion of lottery-type stocks in a portfolio brings higher returns within a short period of time.Originality/value– Compared to earlier studies that focussed on the price performance of stocks of good companies and investor trading behavior in relation to lottery-type stocks, this study aims to investigate the influence of stock characteristics on price performance, trading activities, and psychological pitfalls.