Of astrologers, experts and random stock picks

MUMBAI: What is it that makes one company more successful than others in the same line of business? Financial astrologers would have us believe the date of formation of a company affects its future financial performance, for good or bad.

Richard Wiseman, professor of psychology at the University of Hertfordshire in Great Britain, decided to test if this was true. He discusses the experiment and its findings in the book, Quirkology - The Curious Science of Everyday Life.

“The experiment involved three participants—a financial astrologer, an experienced city analyst and a young child. At the start of the test, we gave them a notional 5,000 pounds each, and asked them to invest the money as they thought best in the stock market. Then over the course of a week, we tracked their choices,” writes Wiseman.

The young child was a girl named Tia. She and the other two professionals were to invest their notional cash in any of the one hundred largest companies in the UK.
Tia’s choice was to be totally random. To ensure that, the author had the names of the hundred companies written on chits of paper and threw the papers high into the air so Tia could randomly grab four of them as they fluttered to the ground. Tia’s notional investments went into Bank of Scotland, Diageo, Old Mutual and Sainsbury.

The two experts also made their picks. “Our financial astrologer carefully examined the formation date of the companies, and promptly plumped for a variety of different sectors, including communication and technology-based stocks (Vodafone, Emap, Baltimore Tech, and Pearson). Our investor drew on his seven years of extensive experience, and decided to invest within the communications industry (Vodafone, Marconi, Cable and Wireless, and Prudential).”

Over the course of the week, the three participants were allowed to make changes to the initial investments they had made. “Our financial astrologer again consulted the heavens, and swapped three of her choices, so that her final portfolio contained BOC, BAE Systems, Unilever, and Pearson,” writes Wiseman.

“In an interview with journalists, she justified her decisions on the basis that these companies had a good planetary wind behind them. Our expert investor chooses to stick with his original selections. A second round of random paper-dropping left Tia with Amvescap, Bass, Bank of Scotland, and the Halifax,” the author writes.

After one week, the performance of the three investors was evaluated again.
“It had proved an exceptionally turbulent week for the stock market. Strangely enough, neither of our experts had seen the crash coming. In line with this dramatic downward trend, all three of our participants had lost money. Bottom of the league came the financial astrologer, whose heavenly decisions resulted in a 10.1% loss. The expert investor came a close second with 7.1% loss. Top of the class came Tia, with a loss of just 4.6%,” writes Wiseman.

The investor said that he had expected to finish last all along, and that Tia would win. The financial astrologer “turned to the heaven to help explain her failure, noting that if she had known beforehand that Tia was a Cancerian she wouldn’t have played against her.”

Critics would say that one week is not a long enough time in the stock market. So the experiment was continued for one year. And at the end of the year, results were even more dramatic.

“Our investor had made a 46.2% loss on his original investment. The financial astrologer did somewhat better, but still made a 6.2% loss. Once again, Tia led the pack. In the face of a falling market she had managed to make a 5.8% profit,” writes Wiseman.

Understandably, the experts are not really the experts they are made out to be.
“This was not the first time that the wisdom of city analysts had come under scrutiny and found wanting. In a similar Swedish study, a national newspaper gave $1,250 each to five experienced investors and a chimpanzee named Ola,” writes Wiseman.

“Ola made his choice by throwing darts at the names of companies listed on the Stockholm exchange. After a month, the newspaper compared the profits and losses made by each competitor. Ola had outperformed the financial wizards.”

Similarly, the Wall Street Journal regularly asks four investors to pick one stock apiece, and then randomly selects four stocks using Ola’s dart-throwing technique. After six months, the paper compared the returns on stocks selected by the experts with the ‘dartboard portfolio’. The darts are often the more successful, and almost always beat at least one of the experts, writes Wiseman.

k_vivek@dnaindia.net