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UBS: Psychology Behind Most Investors
By: Vance Wong
Articles (74) Profile

Many investors and economists have always been trying to find out some concrete reasons of price implications, mainly because of investor behaviour. Understanding investor behaviour would not guarantee spot-on investment predictions, but provides a rough idea of how and when the general market would sway.

In a recent issue of UBS’s Academic Research Monitor, several analysts and researchers presented a research study Behavioural Investing Patterns. Three theories were discussed: rank effect; earnings seasonality; and dividend-chasing behaviour.

Rank Effect: Selling Best And Worst Performing

The author first talked about the disposition effect, that is closely related to the rank effect. It is said that investors tend to sell their profit-making stocks while holding on to their losing positions. Whereas for the rank effect, there is a symmetrical correlation such that investors would sell both the most profit-making stocks and those that made the most loss.

According to the study, the rank effect looks at how investors rank stocks in their portfolio according to their performance. When investors rank the stocks, the author argued that they would tend to focus more on the extreme ranks; the best and worst performing stocks.

Earnings Seasonality: Certain Seasons Tend To Outperform

A good analogy to describe the gist of the second theory is using an ice cream company’s highest earnings during summer. The authors of the study found that for most stocks, there tend to be a quarter where earnings would be the highest and outperform analyst expectations.

One possible reason is investors and analysts tend to base their predictions on recent and previous earnings results. For example, a company reports high-earnings consistently on the same quarter every year.

If that is the case, predictions would tend to be overestimated the quarter after a high-earnings season. Subsequent predictions would then be bearish till the next high-earnings season. If this behaviour is consistent, the cycle will repeat, which is termed as the earnings seasonality.

Dividend Month Premium: Prices Increase Substantially Before Payouts

Most investors would be driven by various factors when looking at stocks. The authors noted that stocks with dividend payouts tend to sell at premiums during the expected dividend payout month.

An important point to note: investors would not know exact dates of payouts, but they can predict based on previous payout dates.

For investors to receive the payouts, they have to buy the stocks at least two trading days before the payout date, which is called the ex-date. The authors pointed out that stock prices would peak closer to their ex-dates, and plunge right after payouts.

Investor Takeaway

As much as these research studies might not be applicable to the entire market, it might be true across the general investment community. Looking at these theories could give investors a clearer idea of how and why stock market volatility is more unpredictable at certain times of the year.

With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

Please click here for more information about this author.


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