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Now you see it now you don’t: The effectiveness of the recognition heuristic for selecting stock

Andersson, Patric and Rakow, Tim (2007) 'Now you see it now you don’t: The effectiveness of the recognition heuristic for selecting stock.' Judgment and Decision Making (2). pp. 29-39. ISSN 1930-2975

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Abstract

It has been proposed that recognition can form the basis of simple but ecologically rational decision strategies (Gigerenzer \& Goldstein, 1996). Borges, Goldstein, Ortmann, \& Gigerenzer (1999) found that constructing share portfolios based on simple name recognition alone often yielded better returns than the market index. We describe four studies with seven samples of participants from three countries (total N = 319) in which the returns of recognized and unrecognized shares from several stock markets were tracked over various periods of time. We find no support for the claim that a simple strategy of name recognition can be used as a general strategy to select stocks that yield better-than-average returns. However, there was some suggestion in the data that recognition performs better when the market is falling and worse when it is rising. A follow-up study indicated that the absence of an overall recognition effect could not easily be attributed to our reliance on student participants or smaller samples than Borges et al.\ (1999) had used. We conclude that, with respect to changes in value, selecting stocks on the basis of name recognition is a near-random method of portfolio construction that offers little, if any, benefit to the personal investor.

Item Type: Article
Uncontrolled Keywords: heuristics, recognition, investment
Subjects: B Philosophy. Psychology. Religion > BF Psychology
Divisions: Faculty of Science and Health > Psychology, Department of
Depositing User: Jenny Connolly
Date Deposited: 21 Jul 2015 15:34
Last Modified: 21 Jul 2015 15:34
URI: http://repository.essex.ac.uk/id/eprint/12957

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