Have you ever confused one stock with another, mistakenly buying one when intending to buy the other?
Don't be too sure that you haven't. A new study has found that cases of mistaken identity are far more common in the investment arena than previously thought.
To be sure, most of us are aware of isolated examples of such confusion, which get media attention when they happen and are the occasion for a good chuckle all around. Earlier this spring, for example, a penny stock called Zoom Technologies (ZOOM) skyrocketed more than 50,000% for no apparent reason other than naïve investors confusing it with Zoom Video Communications (ZM) - Get Report , whose IPO came in April.
Or maybe you remember what happened when Twitter (TWTR) - Get Report filed papers to go public in late 2013: The stock of another penny stock, Tweeter Home Entertainment Group (since delisted) soared 1,800%.
A new study, forthcoming in the Journal of Financial Markets, finds that mistaken identity is far more common than these isolated examples would suggest. It's titled "How Much Do Investors Trade Because of Name/Ticker Confusion?," and its authors are finance professors at the Rutgers School of Business: Vadim S. Balashov and Andrei Nikiforov.
The professors first examined how many publicly traded firms share a significant part of their name or their ticker symbol with another, and are thus vulnerable to investor confusion. (They excluded words like "Corp." and "Inc.") They found a surprisingly high proportion -- 55%, in fact. An example they provide is between Ford Motor Co. (F) - Get Report , the well-known automaker, and Forward Industries, whose ticker is (FORD) - Get Report .
Just because the opportunity exists for investors to be confused about such companies doesn't mean that they actually make errant trades, of course. The researchers therefore devised a test: They constructed pairs of stocks that are otherwise unrelated but nevertheless share a significant part of their name or ticker. They then measured whether these stocks were more highly correlated than other pairs of stocks picked at random over the period of their study (1993-2013).
A surprisingly large percentage of them were. Furthermore, Nikiforov told me in an interview, their results are conservative -- the actual extent of mistaken identity is undoubtedly much bigger than even they found.
When the phenomenon of mistaken identity has been noted in the past, it's been characterized as yet more evidence of the irrationality and stupidity of individual retail investors. But the professors raise the possibility that those investors are not the only ones guilty of confusing otherwise unrelated stocks.
Consider, for example, computer trading platforms that rely on algorithms to sift through myriad news feeds to execute trades in advance of the rest of the market. There's no way of knowing for sure, but it certainly seems plausible that an algorithm could mistakenly conclude that a news story about a company named Ford is instead about a company with the ticker FORD.
Professor Nikiforov added that many trading algorithms are not as sophisticated as we might think. He referred in this regard to a mistake that Google's algorithms made in 2007 when Graco Children's Products, a division of Newell Brands (NWL) - Get Report announced a recall of some of its products. Even though Google's algorithms presumably are some of the more sophisticated in the industry, they nonetheless mistakenly placed the news story about this recall next to the stock quote for Graco Inc. (GGG) - Get Report , a totally unrelated company. And, sure enough, Graco Inc.'s stock dropped by over 2.5%.
In any case, these cases of mistaken identity are yet more evidence of the market's inefficiencies. And this study suggests that these inefficiencies are far more widespread than previously thought.
This new study brings to mind the joke about two economists who are standing on a street corner when the younger one sees a $20 bill. When he bends down to pick it up, the older economist tells him not to bother, since if it were in fact a $20 bill someone would have already taken it.
The point of this new study is that, sometimes, it really is a $20 bill.
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