Superstitious Behavior In Financial Decision-Making
Danika J. Wright
The University of Sydney Business School
May 30, 2016
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Superstition surrounding lucky numbers is observed to affect behavior in consumer goods and investment markets alike. In paying more (less) for assets perceived to be lucky (unlucky), individuals are revealing themselves as ‘enculturated’ actors in their financial decisions. This paper develops an economic framework for identifying the value assigned to ‘luck’ and examines the effect of the numbers 8 and 4 in addresses on housing prices in Sydney, Australia. These numbers are considered exceptionally lucky and unlucky, respectively, in Chinese culture. This is the first paper to test for luck-motivated behavior in both transaction and rental housing prices. Contrary to prior studies we find no evidence of a price premium (discount) attached to the number 8 (4) in transaction prices. Rental prices, however, indicate a statistically significant premium attached to the number 8 in areas of high Asian-migrant population. We provide evidence to demonstrate that this result can not be explained by a rational expectation of future luck-motivated behavior. Taken together, these results indicate that perceptions of luck are culturally-determined and that luck provides amenity, not investment, value.
Superstitious Behavior In Financial Decision-Making – Introduction
Are people willing to pay a premium in order to feel ‘lucky’ in financial decisions? While gamblers may search for luck with each roll of the dice, it is typically expected that when making significant financial decisions, investors are ultimately driven by rational and well-informed thought processes. However, a growing literature identifies irrational and, at times, gambling-like tendencies in investment markets (for example Bali et al, 2011). This paper aims to determine the price of luck in one of the largest financial decisions most individuals will make in their lifetime: the purchase of a house and choice of residence.
We approach the luck-motivated behaviour, and its consequent impact on prices, as an outcome of the “cultural mental model” described by Stiglitz and Hoff (2016). In this model, the authors identify that individual’s behavior is strongly influenced by the profound cultural influences and social norms to which they are exposed. This can be expected to be particularly acute in perceptions of luck, particularly when determined by a culturally defined set of superstitious beliefs. Consider the case of an individual faced with a two-dimensional choice where all factors are constant aside from a single attribute which has zero unconditional value. However, a superstitious individual may believe this attribute (e.g. color, number, shape) has an association with an exogenous outcome (e.g. will it be a sunny or rainy day). Consequently, their perception is that the exogenous outcome is actually endogenous to the choice they presently face. To a non-superstitious individual, the value of the two present choices is identical. The superstitious individual though will assign a higher (lower) valuation to the choice with the lucky (unlucky) attribute.
A wide range of individually-determined and uncorrelated lucky attributes may exist. These irrational beliefs are unlikely to lead to a convergence of behaviors, and so we do not argue that individual superstitions influence market-level prices. Instead, we focus on the impact of a strong culturally-embedded superstition on financial decision-making: The Chinese ‘numerology’ superstition that associates luck with the number 8 and misfortune with the number 4.
A large bank of anecdotal evidence exists to support the significance of these particularly auspicious numbers in decision-making by individuals influenced by Chinese culture. These range from setting the time and date of the Beijing Olympics Opening Ceremony to 8:08:08 pm on the 8th August 2008, to the omission of rows marked 4 on some Chinese passenger aircraft.
Thus far, however, there is only limited robust evidence that superstition, Chinese or Western, impacts financial decision-making. Brown et al (2002), Brown and Mitchell (2008) and Na and Schneider (2010) find evidence of price clustering around culturally significant numbers on stock markets in Asia with large numbers of Chinese investors. By contrast, there is no consistent evidence that the widely held ‘Western’ unlucky number, 13, affects financial markets. Kolb and Rodriguez (1987) identify a negative “Friday the 13th” effect, though subsequent studies have found no meaningful influence of this date on stock returns (Dyl and Meberly, 1988; Agarwal and Tandon,1994; and Coutts, 1999). An individual’s attachment to a cultural belief may increase through exposure to belief contagion and confirmation bias, and decrease through absence or exposure to competing beliefs. However, while the cultural influence exists, societal norms and expectations may force an individual to still make a superstition-motivated decision. The methods by which cultural influences affect preferences is extensively analyzed in the marketing science discipline (for example, Grossman and Wisenblit, 1999). In the behavioral economics literature economics, Hoff and Stiglitz (2016) identify that East Asians tend to be more interdependent in their thinking. Adding to this the observation by Kim and Nofsinger (2008) that across various cross-cultural behavioral finance studies individuals of Asian background are more likely to demonstrate behavioral biases than individuals from Western backgrounds (see also Chen et al, 2007), we focus this study primarily on the influence of Chinese superstitions.
We access a large sample of transaction and rental prices for houses and units in Sydney, Australia, for the period 1 January 2000 to 30 June 2014. All observations include comprehensive property address and characteristic data. Numbers in the street (and apartment, where applicable) address are flagged as lucky or unlucky based on both Chinese and Western cultural beliefs.
In studying house purchase and rental decisions, we are able to capture the influence of luck-driven behavior in a broad population. Though several prior studies have also considered the significance of Chinese superstitions in residential property transactions, this is the first to examine the impact on rents. Furthermore, most earlier studies in this area are restricted to highly homogenous populations. Notable exceptions are Bourassa and Peng (1999) and Fortin et al (2014) which study the Auckland, New Zealand, and Vancouver, Canada, housing markets, respectively. While in our initial analysis we follow Fortin et al (2014) in using the natural experiment that highly multicultural cities, such as Vancouver and Sydney, present in testing the impact of competing superstitions on transaction prices,
all other analyses are unique to this paper.
We analyze a much larger and representative sample and find that in property transaction decisions, there is no evidence to indicate that any number-related superstition sufficiently motivates behavior so as to impact prices. This result is robust to various methodological testing and factoring in the strength of cultural influence through the use of Census data. It indicates that the Sydney housing market is less irrational than some may think!
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