Stock graphs can mislead investors into making wrong decisions

     Investors, who keep track of stock markets via charts, tend to make a baseless decision about the riskiness of a stock based on its run-length, according to a new study by Indian-origin researchers. Stock graphs are everywhere, available on financial and public websites to be loaded and customized by users. Authors Priya Raghubir (New York University) and Sanjiv R. Das (Santa Clara University) found that investors believe that stocks with shorter up-and-down movements are less risky than those with longer run-length. This is called the "run-length" effect. They tested three groups-affluent Californians, undergraduates, and general investors-and found that all three judged a stock with a shorter run-length more favorably. It was found that the run-length effect increases with greater education and frequency, length, and diversity of trading experience. The researchers concluded that owing to large amount of data presented on a graph, investors simplify their task by sampling points from a financial instrument's price history to estimate trend and noise. The sampling strategy leads to perceptual biases when the sample points are not representative of the price series. The authors believe there are public policy implications that might lead to how data is presented because "systematic biases in risk perceptions may permeate the market uniformly, resulting in persistent biases in prices. . . From a consumer perspective, individual investors should be made aware of their biases in appraising and comparing stocks using charts." "These results have implications for how financial information is communicated to investors," wrote the authors. From a public policy perspective, regulators should consider imposing guidelines about how financial information is presented to individuals. The study has been published in the Journal of Consumer Research.

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