Impact of Irrational and Superstitious Beliefs on Financial Markets

Alexey Usachev

Student thesis: Master thesis


The thesis focuses on how feeling lucky and superstitious beliefs interfere with decision-making and add talisman value to assets. It is argued that superstitious beliefs are essentially irrational ideas that should not play a role in a fully rational market, because they do not affect a probability of a profitable investment. It is shown that while investors’ rationality becomes more bounded when financial markets become highly uncertain and volatile, the role of superstitious beliefs dramatically increases and becomes comparable in magnitude to conventional determinants of a stock performance. This consideration has not so far been researched in financial literature to the best of our knowledge.
The inferences in the thesis allow rejecting the base hypothesis of the irrelevance of superstitious beliefs for assets prices; the thesis documents a distortion in individuals’ expectations from superstitious beliefs and feeling of luck. This distortion indicates that the effect of superstitious beliefs is irrational, because it changes its direction during times of higher market returns volatility and hence, is not a self-fulfilling prophecy. Assets that make people feel lucky return extra 40 basis points per month (4.9% per annum) when market exhibits elevated volatility (becomes more risky and unpredictable). On the other hand, they underperform when a market rallies.
The thesis derives a premium equivalent to 5.4% of the mean Tobin’s q value, 7.0% of Market-to-Book value, 5.7% of Price-to-Earnings value during three years after the IPO date for assets with lucky sentimental meaning. Individuals’ optimism is quite resilient to performance of a company: ROE as a performance indicator is less significant for companies with lucky listing codes than for the rest.
The thesis concludes that superstitious beliefs, despite being irrational, do not necessarily play a negative role in financial markets: the evidence is consistent with earlier findings from anthropology that resorting to magic and rituals in a highly uncertain and risky environment is highly common because it helps to reduce anxiety. Stocks with lucky sentimental meaning exhibit lower volatility (-1.1%) than the rest of the stocks, which is shown in the thesis, and move against the market when volatility is high, so it is possible that superstitious beliefs play a stabilizing role in the market, delivering illusion of control to individuals, reducing the anxiety and increasing confidence in the choices.

EducationsMSc in Advanced Economics and Finance, (Graduate Programme) Final Thesis
Publication date2016
Number of pages83
SupervisorsJimmy Martínez-Correa