Wednesday, November 5, 2014 | 2:00pm – 3:30pm |  Room 335, HSBC Business School Building

Abstract

Superstition, which is defined as a belief that is not based on reason, has been a part of the human condition since humans began. But does superstition adversely affect human welfare? We answer this question in the context of trading in the Taiwan Futures Exchange, where we exploit the Chinese superstition that the number “8” is lucky and the number “4” is unlucky. Defining a ”superstition index” of a trader as the proportion of limit order submissions at prices ending at “8”minus the proportion of limit order submissions at prices ending at “4,” we find that individual investors are superstitious but institutional investors are not. Further, amongst individual investors, there is a negative correlation between trading profits and the superstition index. We find that these losses arise from poor trades at nearly all price points for a superstitious trader, not just at “8” and “4,” suggesting that superstition may be a symptom of a lack of financial sophistication. Nevertheless, the more investors learn from their trading experience, the less superstitious they become.