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Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect

Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect
Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect
Investors’ perceptions of price have been shown to be disproportionately affected by the left-most digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors’ behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias.
Left digit effect, individual trading behaviour, heuristics, round numbers in profit
1351-847X
874-891
Kansara, Amey Pramodkumar
e9991d2e-1d75-41df-b475-0e00f5a806e8
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4
Kansara, Amey Pramodkumar
e9991d2e-1d75-41df-b475-0e00f5a806e8
Sung, Ming-Chien
2114f823-bc7f-4306-a775-67aee413aa03
Ma, Tiejun
1f591849-f17c-4209-9f42-e6587b499bae
Johnson, Johnnie E.V.
6d9f1a51-38a8-4011-a792-bfc82040fac4

Kansara, Amey Pramodkumar, Sung, Ming-Chien, Ma, Tiejun and Johnson, Johnnie E.V. (2020) Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect. European Journal of Finance, 26 (9), 874-891. (doi:10.1080/1351847X.2020.1717976).

Record type: Article

Abstract

Investors’ perceptions of price have been shown to be disproportionately affected by the left-most digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors’ behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias.

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More information

Accepted/In Press date: 17 December 2019
e-pub ahead of print date: 26 January 2020
Keywords: Left digit effect, individual trading behaviour, heuristics, round numbers in profit

Identifiers

Local EPrints ID: 436605
URI: http://eprints.soton.ac.uk/id/eprint/436605
ISSN: 1351-847X
PURE UUID: 50ef12b3-47ec-4d5b-944b-1c3f6208c94e
ORCID for Ming-Chien Sung: ORCID iD orcid.org/0000-0002-2278-6185

Catalogue record

Date deposited: 18 Dec 2019 17:30
Last modified: 10 Mar 2020 01:28

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