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The ABCs of IPOs: Easy-to-Pronounce Stocks Do Best

The ABCs of IPOs: Easy-to-Pronounce Stocks Do

There are myriad strategies for making a company's first day of stock trading a good one.

Add a pronounceable ticker symbol to the list.

A new study of initial public offerings (IPOs) found that stocks with ticker symbols you can actually say, such as ELY or MUF, did vastly better on opening day than jumbles like SRX and GMD.

The finding does not speak too well for the rationality of markets or investors.

"This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational," said Danny Oppenheimer, an assistant professor of psychology at Princeton University. "These findings contribute to the notion that psychology has a great deal to contribute to economic theory."

How a few real-word stocks did on their fist day of trading:

Pronounceable ticker codes

PER (Perot Systems Corp) +172% ECI (Excel Communication Incorporated) +90% MUF (Manufactured Home Communities) +75% ENT (Equant NV) +62% ELY (Callaway Golf Co.) +62%

Unpronounceable ticker codes

KNL (Knoll Incorporated) -99.8% GTS (Global Telesystems Group) -97% SRX (SRA International Incorporated) -87% MRX (Medicis Pharmaceutical Group) -50% GMD (Grupo Mexicano de Desarrollo) -42%

The effect wears off over time, however.

"We looked at intervals of a day, a week, six months and a year after IPO," said Princeton graduate student Adam Alter. "The effect was strongest shortly after IPO. For example, if you started with $1,000 and invested it in companies with the 10 most fluent names, you would earn $333 more than you would have had you invested in the 10 with the least fluent."

The research, funded by the National Science Foundation, involved stocks on the New York Stock Exchange and the American Stock Exchange. Atler and Oppenheimer detailed their findings yesterday in the Proceedings of the National Academy of Sciences.

No big surprise

The finding is in keeping with other psychological studies that reveal people use mental shortcuts to evaluate complex information. In general, people judge easy-to-process stimuli as more convincing, familiar and famous, the scientists say.

The research took into account company size. "We thought it was possible that larger companies might both adopt more fluent names and attract greater investment than smaller companies," Atler said. "But the effect held regardless of company size."

The research began in a laboratory setting. Students were asked to judge the prospects of fictitious companies, and Atler and Oppenheimer realized that pronounceability was a major factor in yielding positive outlooks.

They caution against using the finding as a sound investment strategy.

"You shouldn't make changes to your stock portfolio based on our findings," Oppenheimer said. "The primary contribution of this paper is to add a piece to the jigsaw of understanding how markets operate."

Robert Roy Britt
Rob was a writer and editor at starting in 1999. He served as managing editor of Live Science at its launch in 2004. He is now Chief Content Officer overseeing media properties for the sites’ parent company, Purch. Prior to joining the company, Rob was an editor at The Star-Ledger in New Jersey, and in 1998 he was founder and editor of the science news website ExploreZone. He has a journalism degree from Humboldt State University in California.