TY - JOUR
T1 - Towards a better understanding of the full impact of the left digit effect on individual trading behaviour
T2 - unearthing a trading profit effect
AU - Kansara, Amey Pramodkumar
AU - Sung, Ming-Chien
AU - Ma, Tiejun
AU - Johnson, Johnnie E. V.
PY - 2020/1/26
Y1 - 2020/1/26
N2 - Investors’ perceptions of price have been shown to be disproportionately affected by the left-most digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors’ behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias.
AB - Investors’ perceptions of price have been shown to be disproportionately affected by the left-most digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors’ behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias.
KW - Left digit effect
KW - individual trading behaviour
KW - heuristics
KW - round numbers in profit
U2 - 10.1080/1351847X.2020.1717976
DO - 10.1080/1351847X.2020.1717976
M3 - Article
VL - 26
SP - 874
EP - 891
JO - The European Journal of Finance
JF - The European Journal of Finance
SN - 1351-847X
IS - 9
ER -