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The Long and Short of It: Why Are Stocks with Shorter Runs Preferred?

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  • Priya Raghubir
  • Sanjiv R. Das

Abstract

This article examines how consumers process graphical financial information to estimate risk. We propose that consumers sample the local maxima and minima of a graph to infer the variation around a trend line, which is used to estimate risk. The local maxima and minima are more extreme the higher the run length of the stocks (the consecutive number of upward or downward movements of a price series with identical mean, variance, skewness, and kurtosis). Three experiments show that this leads to stocks with higher run lengths being perceived as riskier: the run-length effect. Importantly, the run-length effect is greater for investors who are more educated, are employed full time, trade more frequently, have had longer experience trading, and trade a wider range of financial instruments. Implications for the communication of financial products, public policy, and consumer welfare are discussed, as are theoretical implications for the processing of visual and financial information and behavioral finance. (c) 2009 by JOURNAL OF CONSUMER RESEARCH, Inc..

Suggested Citation

  • Priya Raghubir & Sanjiv R. Das, 2010. "The Long and Short of It: Why Are Stocks with Shorter Runs Preferred?," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 36(6), pages 964-982, April.
    • Handle: RePEc:oup:jconrs:v:36:y:2010:i:6:p:964-982
    DOI: 10.1086/644762
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    Cited by:

    1. Dan Zhu & Qingwei Wang & John Goddard, 2022. "A new hedging hypothesis regarding prediction interval formation in stock price forecasting," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(4), pages 697-717, July.
    2. Hoffmann, Arvid O.I. & Broekhuizen, Thijs L.J., 2010. "Understanding investors' decisions to purchase innovative products: Drivers of adoption timing and range," International Journal of Research in Marketing, Elsevier, vol. 27(4), pages 342-355.
    3. Bansal, Avijit & Jacob, Joshy, 2022. "Impact of Price Path on Disposition Bias," Journal of Banking & Finance, Elsevier, vol. 143(C).
    4. Nolte, Sven & Schneider, Judith C., 2018. "How price path characteristics shape investment behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 154(C), pages 33-59.
    5. Jaakko Aspara & Arvid Hoffmann, 2015. "Selling losers and keeping winners: How (savings) goal dynamics predict a reversal of the disposition effect," Marketing Letters, Springer, vol. 26(2), pages 201-211, June.
    6. Aspara, Jaakko & Chakravarti, Amitav & Hoffmann, Arvid O. I., 2015. "Focal versus background goals in consumer financial decision-making: trading off financial returns for self-expression?," LSE Research Online Documents on Economics 64129, London School of Economics and Political Science, LSE Library.
    7. Devdeepta Bose & Henning Cordes & Sven Nolte & Judith Christiane Schneider & Colin Farrell Camerer, 2022. "Decision Weights for Experimental Asset Prices Based on Visual Salience," The Review of Financial Studies, Society for Financial Studies, vol. 35(11), pages 5094-5126.
    8. Michael Braun & David A. Schweidel, 2011. "Modeling Customer Lifetimes with Multiple Causes of Churn," Marketing Science, INFORMS, vol. 30(5), pages 881-902, September.
    9. Daphne Sobolev & Nigel Harvey, 2016. "Assessing Risk in Graphically Presented Financial Series," Risk Analysis, John Wiley & Sons, vol. 36(12), pages 2216-2232, December.
    10. Yasmina Okan & Eric R. Stone & Wändi Bruine de Bruin, 2018. "Designing Graphs that Promote Both Risk Understanding and Behavior Change," Risk Analysis, John Wiley & Sons, vol. 38(5), pages 929-946, May.
    11. Aspara, Jaakko & Chakravarti, Amitav, 2015. "Investors’ reactions to company advertisements: the persuasive effect of product-featuring ads," LSE Research Online Documents on Economics 64130, London School of Economics and Political Science, LSE Library.
    12. Chatterjee, Subimal & Dalman, M. Deniz & Mookherjee, Satadruta, 2020. "To short or not to short? Improving morality judgments of short trades and short traders," Journal of Business Research, Elsevier, vol. 114(C), pages 173-185.

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