Repeating one's errors

Just when I'm trying to wean myself off behavioural finance, along comes this:

Sports Direct International , the country's biggest sports goods retailer, said recent wet weather had hit sales and it expected little earnings growth this year, sending its shares down over 15 percent Shares in the group, which floated at 300 pence in February and netted founder Mike Ashley 929 million pounds, slid to a new low of 158 pence in early trade.

The thing is, this tendency for newly-floated shares to do badly is an old, well-established fact. Jay Ritter's established it in the US, and the same seems true in the UK too (pdf). Recent developments have corroborated the trend. Sports Direct merely follows Debenhams and Qinetiq as recent high-profile floats that are below their float price. Most of the 327 stocks floated in the UK last year have under-performed the All-share so far this year.
This raises the question: why do people consistently make the same mistake, and continually sign up for new floats, despite the fact that new floats, on average, under-perform?
Ignorance of history is no excuse. Basic common sense tells us to beware of new floats. After all, if Mike Ashley thought it was a good idea to sell Sports Direct in February, why would other people, who knew the business much less well than him, think it a good idea to buy?
I suggested some possible reasons for this here. I'd add a couple of others:
1. Regret aversion. If a high-profile stock rises, people would kick themselves for missing out. In anticipation of this, they would buy the stock. And new issues have higher profiles than established stocks.
2. The heuristic of social proof. If other people do something, we follow. So the weight of buying by  other investors urges people to buy. This offsets the deterrent sent by the fact that a well-informed person - the owner of the business - is selling.
Whatever the reason, there's an important lesson here that extends well beyond the dull boundaries of finance. People can make systematic errors. And if they do so even when they have real money at stake, how much more likely are they to be mistaken when they don't have so much to lose, such as in politics?

Comments

[Phil]

"Regret aversion" - nicely put. Someone I know went big-ish on Egg (bigger than they'd like, anyway) and that was precisely the motivation.

[Matt Munro]

Is it always a mistake though ? Common sensically, all shares were new floats at some point, even microsoft.

[Pseudonymous]

Isn't the last point the argument for futarchy: http://hanson.gmu.edu/futarchy.html ?

That if people bet their own money on a goverment policy, as they they bet their own money on stocks and shares, they would think more carefully about them?

[Meh]

Or if people put as much thought into policy as they do into betting on the horses, they'd be making just as successful bets, as evidenced by the renowned poverty of bookmakers in our society?

[Meh]

I think every "economics inclined person" who approvingly links to the Caplan thesis should consider carefully how Caplan fails to distinguish between "aggregate" effects of policy and "personal" ones.

The society I live in might get richer as part of free trade, but if I lose my well-paid job because protections are taken away from my industry (e.g. the British Hedge Fund Legal Contract Industry) then why would it be "rational" for me to vote for "freer trade?"

You can't have it both ways, Mr Caplan.

[RJH Adams]

It's a case of pick your time frame for the IPO studies cited. 3 to 5 years is one thing; but try telling that story to the pro stags (other than those in exceptionally poorly IPOed Sports Direct) who consistently make money - even in DEB and QQ.

[dsquared]

[why do people consistently make the same mistake, and continually sign up for new floats, despite the fact that new floats, on average, under-perform?]

??? the stylised fact is that IPOs are underpriced, and that it's the company which typically leaves money on the table. Stagging new issues is pretty much the most reliable way of getting rich that there is. Floats might underperform over some arbitrarily selected longer time period, but that's not the problem of the people who got IPO stock.

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