Can Ignorance Beat the Stock Market?

Abstract

(from the chapter) Proposes a fast and frugal heuristic that exploits a lack of knowledge, rather than market-specific information or tools, to construct stock portfolios. The authors tested whether an ignorance-based decision-making mechanism (recognition heuristic) could make money in the stock market. 480 Ss were grouped into 1 of 4 categories: American laypeople, American experts, German laypeople, and German experts. Ss completed a company recognition task. The authors constructed 2 investment portfolios consisting of highly recognized companies and then analyzed their performance for 6 mo. Results show that the recognition knowledge of laypeople turned out to be more profitable than the considered opinions of mutual fund experts. Findings indicate that in investments, there may be wisdom in ignorance. (PsycINFO Database Record (c) 2006 APA, all rights reserved)