The ABCs of Investing

Research from Sy Syms and Seton Hall Finds Alphabetical Bias When Picking Stocks

There are probably many reasons why Apple and Amazon are among the most highly-traded stocks on the market, but one of them is surprisingly simple: they both start with the letter ‘A.’

jesse itzkowitz
Dr. Jesse Itzkowitz, assistant professor of marketing

According to a new study by Dr. Jesse Itzkowitz, assistant professor of marketing at Yeshiva University’s Sy Syms School of Business, in collaboration with his wife, Jennifer Itzkowitz, assistant professor of finance at Seton Hall University’s Stillman School of Business, and her colleague, Scott Rothbort, chief market strategist at Stillman, early alphabet stocks trade more frequently and at higher valuations than later alphabet stocks because individual investors tend to settle on an acceptable option as soon as they find one, instead of evaluating all options based on rigorous analysis in search of the absolute best choice. That tendency is exacerbated by the overwhelming amount of information about the market that’s available to potential investors these days.

“Simply said, investors are lazy,” said Jesse Itzkowitz. “Despite being inundated with investment information, they don’t search through all the information. Instead, they look until they find something that satisfies their minimum criteria. It’s similar to the days when we looked for an exterminator in the Yellow Pages and stopped with ‘Acme Pest Control.’ That is a questionable approach to making any significant life decision.”

The study looked at all stocks traded on the NYSE, AMEX, and Nasdaq between 1985 and 2012. It found that early alphabet stocks are traded 1.7 percent more often than later alphabet stocks and are valued 6.1 percent higher.

The study also noted that the trend toward early alphabet stocks didn’t become evident until 1998, when the advent of easily-accessible information on the Internet began to influence investors, and that individual investors were susceptible to the effect, but institutional investors were not.

Source: Jesse Itzkowitz, Yeshiva University’s Sy Syms School of Business
Source: Jesse Itzkowitz, Sy Syms School of Business

“As investors have gained the ability to review more stocks and more information about each stock, they have increased reliance on the default, alphabetical ordering of stock information,” said Jennifer Itzkowitz. “They start at the beginning of the list, ‘A,’ stop when they find a reasonable stock to buy or sell, and never make it to the end of the list.”

What’s the upshot for the casual investor? For one thing, Jesse Itzkowitz suggests, re-sort stocks by different metrics or attributes before evaluating your choices; determine what criteria matter to you, and focus solely on that. “Human beings are able to expend only so much mental effort before making a decision, so it’s best to focus on a manageable quantity of information,” he said.

Itzkowitz also recommended that investors make sure to do their research when they’re alert and not tired, since mental or physical fatigue can make someone more likely to go with the first option that works, even if it isn’t the best.

And as for those companies with the bad luck to fall later on in the alphabetical lineup? Itzkowitz suggests they seriously consider changing the company ticker or name to begin with a letter earlier on to increase liquidity or the company’s valuation ratio.

“That one percentage point doesn’t sound like a lot, but we’re talking about billions and billions of dollars on a daily basis,” he said.