Whether it is believing in something lucky, like a four-leaf clover, or in bad omens such as breaking a mirror or walking under a ladder, superstition exists around the world. In Chinese culture, for example, the number ‘8’ is believed to be lucky, whereas the number ‘4’ is unlucky. This is because in Mandarin, the pronunciation of ‘8’ sounds like ‘good fortune’ and ‘4’ sounds like ‘death’.

It is therefore surprising, considering how pervasive superstition is globally, that there is no academic research on the effect of superstition on individual trading decisions and investment performance. Thus, research by Utpal Bhattacharya, Wei-Yu Kuo, Tse-Chun Lin, and Jing Zhao looked to see whether individual investors let their superstitious beliefs in numbers influence their trading; and, if so, how does it affect their performance. They were also interested in finding out whether ‘learning by trading’ can lessen this type of behaviour.

Focusing on the Taiwan Futures Exchange, the study constructed a ‘superstition index’ by calculating the difference between investors’ limit order submission ratios at prices ending in ‘8’ and at ‘4’ – the higher the index, the more superstitious the investor. The findings showed that individual investors are indeed influenced by number superstition, whereas institutional investors are not. It was also clear that investment performance was negatively affected. In other words, individual investors submit more limit orders at numbers ending at ‘8’ than at numbers ending at‘4’; more this imbalance, more were the trading losses.

But why is this so? In financial markets, there are two ways investors can lose by trading: either by choosing the wrong investment and/or doing so at the wrong time. Because the current study looked at index futures (the entire market basket bought at an agreed price but paid for later), the only reason traders could lose money would be due to bad market timing. The study confirmed that superstitious investors do indeed lose money through bad market timing. Specifically, compared to their non-superstitious counterparts, superstitious traders buy less on high market return trading days, and buy more on days with low market returns. They further showed that institutional investors take advantage of this by taking a position on the opposite side.

To see if ‘learning by trading’ could reduce superstitious investing, the research asked whether the superstition index was negatively correlated with trading. It was. This suggested that past trading frequency does help to reduce individual investors’ tendency to submit superstitious limit orders. They concluded that trading experience does reduce superstitious number behaviour.

There is plenty of existing literature on investor behaviour and the biases that affect individual trading decisions. However, this study shows, for the first time, that some investors do in fact use ‘lucky’ and ‘unlucky’ numbers when making trading decisions and, in doing so, they lose money.