In this spirit of this being my 30th paper, I summarise a study showing how people prefer round prices.
Do investors prefer round stock prices? Evidence from Israeli IPO auctions by Shmuel Kandel, Oded Sarig and Avi Wohl (2001)
Paper #30 #30papers30days 🥳🎉🎈
Do investors prefer round stock prices? Evidence from Israeli IPO auctions by Shmuel Kandel, Oded Sarig and Avi Wohl (2001)
Paper #30 #30papers30days 🥳🎉🎈
📈 Since 1993, Israel has done stock IPOs differently to most countries. In the US, the price pre-determined on day 1.
In Israel, it's an auction, meaning the price is set by the public. On IPO day, people individually pre-order a desired quantity at a given price. 🪄
In Israel, it's an auction, meaning the price is set by the public. On IPO day, people individually pre-order a desired quantity at a given price. 🪄
🧮 The authors examined every individual order (many thousands) from 27/28 Israeli IPOs in 1993-1994.
In an unbiased world, we would expect to see an equal distribution of prices ending in 0, 1, 2, 3, 4, 5, 6, 7, 8, 9
In an unbiased world, we would expect to see an equal distribution of prices ending in 0, 1, 2, 3, 4, 5, 6, 7, 8, 9
Results!
⭕️ People significantly over-prefer round prices (0 & 5)
👑 Zeroes made up 20.8% of all prices submitted. This is SIX standard deviations away from what we'd expect. They are the clear preference.
🥈 Fives came in as second favourite.
⭕️ People significantly over-prefer round prices (0 & 5)
👑 Zeroes made up 20.8% of all prices submitted. This is SIX standard deviations away from what we'd expect. They are the clear preference.
🥈 Fives came in as second favourite.
The propensity to bid at round numbers may be more pronounced at higher prices. This is because the impact of choosing a more satisfying number is less pronounced in bigger numbers.
• Eg, ₪933 vs ₪930 is about the same
• But, ₪7 vs 10 is majorly different
• Eg, ₪933 vs ₪930 is about the same
• But, ₪7 vs 10 is majorly different
Why this paper matters.
Much research has already shown our preference for round numbers, but this presents a case where people are uninfluenced by an intermediary. They chose these numbers of their own accord and had no idea they'd be studied.
Much research has already shown our preference for round numbers, but this presents a case where people are uninfluenced by an intermediary. They chose these numbers of their own accord and had no idea they'd be studied.
Light critique.
GOOD: strong methodology: no social desirability bias, experimenter effects, order effects
BAD: difficult to generalise beyond auction situations - most of the time the price is fixed
BETTER IF: test beyond auction buying - eg when choosing or when selling
GOOD: strong methodology: no social desirability bias, experimenter effects, order effects
BAD: difficult to generalise beyond auction situations - most of the time the price is fixed
BETTER IF: test beyond auction buying - eg when choosing or when selling
Source.
Kandel, S., Sarig, O., & Wohl, A. (2001). Do investors prefer round stock prices? Evidence from Israeli IPO auctions. Journal of banking & finance, 25(8), 1543-1551.
Kandel, S., Sarig, O., & Wohl, A. (2001). Do investors prefer round stock prices? Evidence from Israeli IPO auctions. Journal of banking & finance, 25(8), 1543-1551.
Thank you to everyone who has followed along this month. This has been an insane challenge but I am wholly grateful that I did it.
There were some dark times at 4am and at 1am after the pub, so thank you for the support.
🍻 @OctavianMaxim @ergofin @Behavior2020 @AycockChase
There were some dark times at 4am and at 1am after the pub, so thank you for the support.
🍻 @OctavianMaxim @ergofin @Behavior2020 @AycockChase
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