How Superstition Affects Stock Prices

How Superstition Affects Stock Prices: Even the most pragmatic of Americans have a few superstitions.

Some avoid walking under ladders or have a twinge of anxiety when they break mirrors, and others hang a horseshoe or knock on wood to ward off bad luck.

When the 13th of the month falls on a Friday, you can count on at least a few mentions in the media. On those days, you will see otherwise outspoken detractors of superstition and omens being a little more careful as they go about their daily activities.

Athletes and sports fans may be the most vocal about their superstitions and rituals. Some attach great significance to luck-infused objects, like the Pittsburgh Steelers’ Terrible Towel.

Others eat certain foods or wear charmed items of clothing on game day to ensure a win.

One of the most memorable displays of superstition was a hot topic during the 2004 World Series. Every member of the Red Sox let their hair and beards grow out until the 86-year-old Curse of the Bambino was reversed.

Financial advisors, market analysts, and experienced investors focus on hard data, not superstition, when forecasting market movements – or so they say.

A closer look shows that underneath all of the bluster about evidence-based decisions, there is more than a touch of superstition at work when it comes to stock prices.

Here’s what you need to know about how superstition affects stock prices, and more importantly, how to avoid superstitious stock market investing.

Does Superstition Affect How Investors Trade?

While all sorts of data can be referenced to predict stock movements, the truth is that anything can happen. Investors know that no matter how carefully they time trades and no matter how certain they are of their bets, the fact is that any investment is just that: a bet.

Even the most experienced investors get it wrong sometimes, accruing major losses along the way.

Nonetheless, superstitions abound in the world of investing, as players try to find structure and order in the unpredictability of market movements. They look for patterns and place their bets based on tenuous connections that generally fail to hold long-term.

Wharton Business School researchers explored the impact of superstition on investor behavior, and they found that many theories of market volatility simply don’t hold true in the real world.

Market volatility research assumes rational investors with full information, when in fact, many investors base trade decisions on unsupported beliefs. They assign a cause-and-effect relationship to random events, then expect consistent results.

Even Professional Investors Get Superstitious

Superstitious investing isn’t limited to amateurs. Even the professionals have been known to let myths influence their decision-making.

For example, they trade based on belief in “the Monday effect”, which says Monday’s stock market returns will resemble those of the previous Friday.

An even more prevalent superstition predicts poor market performance in October – likely a result of the October 1929 events that touched off the Great Depression.

However, October isn’t a particularly eventful month from a statistical perspective, though there is more volatility than normal.

Most statisticians see this volatility as a result of superstition, rather than an actual change in market conditions. That leads to interesting questions about self-fulfilling prophecies.

How the 1987 Stock Market Crash Affects Investment Decisions

The October Effect was cemented into the psychology of investment in 1987. That year, the Dow had its largest drop in history on Monday, October 19th.

The index declined by 22.6 percent in an event that would be forever known as Black Monday.

The very next Monday, there was a similar drop in the market, but the reasons for this repeat performance were quite different.

In the second case, economic conditions weren’t driving investor behavior. It was entirely based on superstition. Investors were spooked by the previous week’s events, and behaved as though another crash was inevitable.

The bias against October Mondays went on for years, creating a self-fulfilling cycle. While it hasn’t been as much of an issue over the past decade, the superstition persists in influencing the behavior of some investors. This is particularly true for those that experienced the Black Monday first-hand.

Common Stock Market Superstitions

In an effort to create order out of chaos, it is human nature to make connections between random events.

Investors are just as guilty of falling under the spell of superstition as athletes and their fans. These are some of the most common market-related superstitions:

Beware of the Full Moon 

According to market lore, a full moon brings bad luck to the market, while a new moon does just the opposite.

While the data doesn’t support this connection, it’s nearly impossible to persuade some investors otherwise.

The Super Bowl Effect 

For decades, investors were absolutely certain that an NFC Super Bowl win was good for the market, so trades were influenced by game results.

From 1967 to 2003, it seemed there might be some connection. However, since the turn of the century, the data simply don’t back this theory up.

Nonetheless, the superstition persists, and some investors continue to base trades on which team is favored to win.

The Influence of Fashion

You may have heard the old adage that when hemlines go up, so do the markets, and that was true for most of the 20th century. Sadly, this once foolproof superstition no longer holds, perhaps because fashion trends have changed so much in the past two decades.

This list goes on endlessly, with theories that range from persuasive to downright odd. Most have been debunked by data, but a few have survived the evidence test.

These are some of the superstitions that are supported by data, though it’s not entirely clear which is the cause and which is the effect:

September Slump

September is widely regarded as a bad month for the market – and it’s true. Historically, September is the worst month of the trading year.

Did the superstition develop after evidence rolled in, or did widespread belief in the superstition cause this pattern? It’s hard to say.

Building to Bust 

How about the belief in a connection between massive building projects and a looming recession?

Professional investors expect to see a large drop in the market after the completion of record-breaking skyscrapers.

The Great Depression came on the heels of New York City’s Empire State Building and the Chrysler Building, and the Dow had a two-year low just after Sears Tower was finished.

When Malaysia’s Petronas Towers were completed in 1997, the country saw their markets dive, and the United Arab Emirates’ stock market crashed after the grand opening of the world’s tallest building in 2008.

Is there a science to this phenomenon, or is it coincidence? Everyone has a theory.

How To Avoid Superstitious Stock Market Investing

Having superstitions doesn’t make you a bad investor, but the best set those theories aside in favor of facts.

You can avoid serious errors by basing your trades on data, rather than the day of the week. The stock market is, at its core, unpredictable. It’s tempting to attach meaning to otherwise random events.

However, if the evidence shows a particular investment is unwise, no amount of new moon luck is going to protect your assets.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.