Finding a good name for a brand can seem elusive. But Leif Stromnes, managing director, strategy and growth, DDB Australia, says that it’s slightly easier than you might think.
In 2013, two behavioural psychologists set out to test whether the names given to stock tickers (the abbreviated names given to companies) on the New York Stock Exchange (NYSE) made a difference to the performance of the shares.
A random basket of six companies from the tech, energy, property and finance sectors were selected and their performance was monitored on the day of their initial public offering (IPO).
Short-term investing is a gamble and picking stocks at IPO is notoriously hard. Princeton economist Burton Malkiel famously claimed that a “blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”
But against seemingly impossible odds, the two psychologists accurately predicted which stocks would be heavily traded at launch, with a subsequent price rise, and which would be avoided and suffer a price drop.
How did two financial laypeople with no stock market training prove a world-renowned economics professor wrong?
The clue lay in the names of the stock they chose.
The three companies with ticker symbols that are pronounceable according to the rules of English (that is, it is possible to read them out loud as if they were words) rose between 1% and 15%.
These were OCI Partners – OCIP, Springleaf Holdings – LEAF and Midcoast Energy Partners – MEP.
In contrast, the three companies with unpronounceable names, (where extra sounds had to be added to make them pronounceable) fell between 1% and 4%.
These were Brixmore Property Group – BRX, Essent Group – ESNT and Mavenir Systems – MVNR.
This study was replicated with nearly 1,000 stocks over a 20-year period on the NYSE and the stocks with pronounceable symbols enjoyed a bigger post-IPO boost than their unpronounceable counterparts. The effect was strongest during the first few days of trading. Over time the effect weakened but never quite vanished.
Why is it that investors, many of whom painstakingly dissect reams of data to understand a company’s finances with the aim of making a superior return, ultimately go with stock that is more comfortable to pronounce? The answer is that it is emotionally easy.
People prefer names, objects and events that are less mentally taxing and more cognitively fluent, or easier to process. Fluent concepts seem more familiar, less risky, less threatening and more trustworthy. Even when faced with decisions that are seemingly rational, such as which stock will make me more money, we find it almost impossible to fight our subconscious emotional urges. Brands that are easy to find and easy on the mind are often the big winners at the ecommerce checkout, supermarket shelf and dealership. This is especially true of brand names, where this is often the only cue (along with design) that customers respond to. By making it hard to recognise a brand, or by making the brand name unpronounceable, we invite customers to go elsewhere. Rather than expend cognitive effort, our default reaction is to give up and buy something that is less mentally taxing.
It doesn’t make rational sense. But it sure is easy.
