Let’s start with an experiment. We divide people into two groups, A and B. Then, we ask group A to guess how old Mahatma Gandhi was when he died, taking into account it was after age 9. And we ask group B the same question but taking into account that it was before age 140. Of course, the extra information is useless in both cases. However, it influences the answers in some way. Group A’s average is age 50 while group B’s average is 67. This has to do with irrational decision making. Dan Ariely spoke about this in a TED conference.
Of course, irrational decision making is very present in finance too. An example of this is the Halloween effect. I would like to know the difference between the returns on Halloween versus the returns at the end of any other month. We do this with historical data from 1998 until 2018 for some of the biggest regional and sector indexes. These are the results:
As we can see the return on Halloween is much higher compared to the other 11 months. Let’s carry out another experiment, and combine this Halloween effect with another well known irrational investment, the “Sell in May and go away” theory. To test it, let’s divide a year into two groups of 6 months. From Halloween to the 30th of April and from the 1st of May to the 30th of October. Then, with the same data that we used before, let’s compare the mean return.
It is getting close to the end of October so be ready for the treats. Happy Halloween readers!.