Behavioral economics, explained

Action economics is an understanding of how people act in the real world and why they act like that, combining economics and psychology elements. Unlike neoclassical economics, it is assumed that most people have a clear preference and make selfish decisio n-making based on their choice.

Behavioral economics formed by the study defining this field of Richard Turler, a scholar of the University of Chicago and the Nobel Prize, is the difference between "what to do" and "actually doing". Verify the results of action.

Jump to a section:

• What is behavior economics?
• What is the origin of behavioral economics research, Toversky and Carneman?
• What role did the Richard Turler and the University of Chicago University play the development of this field?
• What is "nudge" in behavioral economics?
• Behavioral Economics Language Guide

What is behavioral economics?

Behavioral economics is based on empirical observations on human behavior, and there were information and usable tools that new classic economists think that they are "rational or optimal". However, it demonstrates that people do not always do it.

For example, why do people often avoid or delay investment, even if they know that investing or exercising in 401k will benefit? Also, why are gambling people who often increase their risk after winning or losing, despite their probability of winning?

By raising such questions and clarifying the answers through experiments, we consider humans as a human being affected by emotions and urges and affected the environment and situation in the field of behavioral economics.

This feature is to treat people as pure rational actors (those who have a perfect sel f-control and do not lose their lon g-term goals) or random errors that are offset in the long term. It is in contrast to the traditional economic model.

Several principles have been created by the research on behavioral economics, which has helped economists better understand human economic behavior. From these principles, governments and companies have developed a policy framework to encourage people to specific choices.

What are the origins of behavioral economics research, and who are Tversky and Kahneman?

Action economics has been expanding since the 1980s, but its history is long: some important ideas in this field are going back to the 18t h-century Scottish economist Adam Smith. You can do it. < SPAN> Action economics understands how people act in the real world and act like that by combining economics and psychology elements. Unlike neoclassical economics, it is assumed that most people have a clear preference and make selfish decisio n-making based on their choice.

Behavioral economics formed by the study defining this field of Richard Turler, a scholar of the University of Chicago and the Nobel Prize, is the difference between "what to do" and "actually doing". Verify the results of action.

What is behavior economics?

What is the origin of behavioral economics research, Toversky and Carneman?

What role did the Richard Turler and the University of Chicago University play the development of this field?

What role have Richard Thaler and behavioral economists at the University of Chicago played in the development of the field?

What is "nudge" in behavioral economics?

Behavioral Economics Language Guide

Behavioral economics is based on empirical observations on human behavior, and there were information and usable tools that new classic economists think that they are "rational or optimal". However, it demonstrates that people do not always do it.

For example, why do people often avoid or delay investment, even if they know that investing or exercising in 401k will benefit? Also, why are gambling people who often increase their risk after winning or losing, despite their probability of winning?

By raising such questions and clarifying the answers through experiments, we consider humans as a human being affected by emotions and urges and affected the environment and situation in the field of behavioral economics.

What is a “nudge” in behavioral economics?

This feature is to treat people as pure rational actors (those who have a perfect sel f-control and do not lose their lon g-term goals) or random errors that are offset in the long term. It is in contrast to the traditional economic model.

Several principles have been created by the research on behavioral economics, which has helped economists better understand human economic behavior. From these principles, governments and companies have developed a policy framework to encourage people to specific choices.

Action economics has been expanding since the 1980s, but its history is long: some important ideas in this field are going back to the 18t h-century Scottish economist Adam Smith. You can do it. Action economics is an understanding of how people act in the real world and why they act like that, combining economics and psychology elements. Unlike neoclassical economics, it is assumed that most people have a clear preference and make selfish decisio n-making based on their choice.

Behavioral economics formed by the study defining this field of Richard Turler, a scholar of the University of Chicago and the Nobel Prize, is the difference between "what to do" and "actually doing". Verify the results of action.

Guide to behavioral economics terms

What is behavior economics?

What is the origin of behavioral economics research, Toversky and Carneman?

What role did the Richard Turler and the University of Chicago University play the development of this field?

What is "nudge" in behavioral economics?

Behavioral Economics Language Guide

Behavioral economics is based on empirical observations on human behavior, and there were information and usable tools that new classic economists think that they are "rational or optimal". However, it demonstrates that people do not always do it.

For example, why do people often avoid or delay investment, even if they know that investing or exercising in 401k will benefit? Also, why are gambling people who often increase their risk after winning or losing, despite their probability of winning?

By raising such questions and clarifying the answers through experiments, we consider humans as a human being affected by emotions and urges and affected the environment and situation in the field of behavioral economics.

This feature is to treat people as pure rational actors (those who have a perfect sel f-control and do not lose their lon g-term goals) or random errors that are offset in the long term. It is in contrast to the traditional economic model.

Are You Investing or Gambling?

Several principles have been created by the research on behavioral economics, which has helped economists better understand human economic behavior. From these principles, governments and companies have developed a policy framework to encourage people to specific choices.

Action economics has been expanding since the 1980s, but its history is long: some important ideas in this field are going back to the 18t h-century Scottish economist Adam Smith. You can do it. Smith is an important concept of classical economics and neoclassical economics, and is well known for the "invisible hand" concept that if each individual makes selfish decisions, the whole economy is led by prosperity. I am. However, he also recognized that he often overstook his abilities, feared losing rather than winning, and tend to pursue shor t-term profits than lon g-term profits. These concepts (overconfidence, avoidance, sel f-control) are the basis of today's behavioral economics. Recently, research on the uncertainty and risks of Israeli psychologist Aimos toversky and Daniel Carneman has become an early roots of behavioral economics. From the 1970s to the 1980s, toversky and Carneman found that there were some consistent biases in ways. For example, if you have read articles about a case attacked by sharks and bears, you may think that being attacked by sharks and bears may be a common cause, but in fact such cases are extremely extreme. It is rare.

Prospect theory has demonstrated that toversky and Carneman that framing and avoiding loss affect people's choices. For example, if you have a chance to get $ 250 with a guarantee, or if you get $ 1000 with a 25 % probability and give a gambling that doesn't get anything with a 75 % chance, most people will definitely choose a certain victory. See. However, if the guarantee of losing $ 750 or the possibility of losing $ 1000, and 25 % of the possibility of not losing anything, most people will lose $ 1000 and will not lose anything. I look forward to the small possibility.

This classic example shows that avoiding $ 1, 000 losses means gaining $ 1, 000, and people are more willing to take a great risk, which is more willing to take great risks. Contracolty with expected utility theory. Professional theory and other studies by Tevelsky and Carneman continue to influence many fields of behavioral economic research today. In the 1980s, Richard Turler began research based on the research of Tevelsky and Carneman, and his joint research with him was extensive. He is currently the founder of the Booth School of Business, Charles R. Walcreen Special Professor (Action Science and Economics).

Turler won the Alfred Nobel Memorial Sweden Lixbank Economic Science Award in 2017 through research that identifies the factors that guide individual financial decisions. His ideas came from a series of observations he had performed in graduate school, which came to think that people's actions deviated from traditional economic models in predictable forms.

For example, Serler gave up watching sports with a friend for blizzards. But if they bought a ticket on their own, the price of the ticket would have been the same, and the danger of driving in the snowstorm did not change, but they would have gone. This is an example of a "penalty error". Regarding a personal invested project, the idea is that even if it means more risk, people do not want to give up much.

Turlers are also known to spread the concept of "nudge", a conceptual device to guide people to make better decisions. "Naggi" is a human psychology, which also uses many other concepts in behavioral economics, such as mental accounting (the idea that people have different money handling depending on the context). For example, a person is happy to drive a car even if the amount of money spent and the amount saved by saving $ 10 in shopping for 20 yen is the same rather than saving $ 10 with a 1000 yen shopping. Is crossed.

Serlers and other economists at the University of Chicago (Leonardo Barstin, Josh Dean, Nicholas Epli, Austtan Goursby, Alex Imus, John List, Susan Mayer, Send Hill Murinasan, Devin Pope, Rebecca Dizon Ross, Heather Sasons, and others) are conducting empirical research, including field experiments.

Key Takeaways

• In behavioral economics, "nudge" is a method of manipulating people's choices and making specific decisions: for example, a high school cafeteria is placed at the height of the eyes or near the cash register. This is an example of a "nudge" to make students choose healthy options. The important point of nudge is that it is not compulsory: it is not a "nudge" to prohibit junk food, and it is not "nudge" to punish people who chose unhealthy ones. < SPAN> Turler won the Alfred Nobele Memorial Sweden Lixbank Economic Science Award in 2017 through research that identifies the factors that guide individual financial decisions. His ideas came from a series of observations he had performed in graduate school, which came to think that people's actions deviated from traditional economic models in predictable forms.
• For example, Serler gave up watching sports with a friend for blizzards. But if they bought a ticket on their own, the price of the ticket would have been the same, and the danger of driving in the snowstorm did not change, but they would have gone. This is an example of a "penalty error". Regarding a personal invested project, the idea is that even if it means more risk, people do not want to give up much.
• Turlers are also known to spread the concept of "nudge", a conceptual device to guide people to make better decisions. "Naggi" is a human psychology, which also uses many other concepts in behavioral economics, such as mental accounting (the idea that people have different money handling depending on the context). For example, a person is happy to drive a car even if the amount of money spent and the amount saved by saving $ 10 in shopping for 20 yen is the same rather than saving $ 10 with a 1000 yen shopping. Is crossed.

Hidden Gambling Tendencies

Serlers and other economists at the University of Chicago (Leonardo Barstin, Josh Dean, Nicholas Epli, Austtan Goursby, Alex Imus, John List, Susan Mayer, Send Hill Murinasan, Devin Pope, Rebecca Dizon Ross, Heather Sasons, and others) are conducting empirical research, including field experiments.

In behavioral economics, "nudge" is a method of manipulating people's choices and making specific decisions: for example, a high school cafeteria is placed at the height of the eyes or near the cash register. This is an example of a "nudge" to make students choose healthy options. The important point of nudge is that it is not compulsory: it is not a "nudge" to prohibit junk food, and it is not "nudge" to punish people who chose unhealthy ones. Turler won the Alfred Nobel Memorial Sweden Lixbank Economic Science Award in 2017 through research that identifies the factors that guide individual financial decisions. His ideas came from a series of observations he had performed in graduate school, which came to think that people's actions deviated from traditional economic models in predictable forms.

Social Proofing

For example, Serler gave up watching sports with a friend for blizzards. But if they bought a ticket on their own, the price of the ticket would have been the same, and the danger of driving in the snowstorm did not change, but they would have gone. This is an example of a "penalty error". Regarding a personal invested project, the idea is that even if it means more risk, people do not want to give up much.

Turlers are also known to spread the concept of "nudge", a conceptual device to guide people to make better decisions. "Naggi" is a human psychology, which also uses many other concepts in behavioral economics, such as mental accounting (the idea that people have different money handling depending on the context). For example, a person is happy to drive a car even if the amount of money spent and the amount saved by saving $ 10 in shopping for 20 yen is the same rather than saving $ 10 with a 1000 yen shopping. Is crossed.

Serlers and other economists at the University of Chicago (Leonardo Barstin, Josh Dean, Nicholas Epli, Austtan Goursby, Alex Imus, John List, Susan Mayer, Send Hill Murinasan, Devin Pope, Rebecca Dizon Ross, Heather Sasons, and others) are conducting empirical research, including field experiments.

In behavioral economics, "nudge" is a method of manipulating people's choices and making specific decisions: for example, a high school cafeteria is placed at the height of the eyes or near the cash register. This is an example of a "nudge" to make students choose healthy options. The important point of nudge is that it is not compulsory: it is not a "nudge" to prohibit junk food, and it is not "nudge" to punish people who chose unhealthy ones.

Contributing Gambling Factors

Thaler's ideas on nudges were popularized in Nudge: Improving Decisions About Health, Wealth, and Happiness (2008, co-authored with former University of Chicago law scholar Cass Sunstein, now at Harvard). Corporations and governments, including the US government under President Barack Obama, have incorporated Thaler and Sunstein's ideas on nudges into their policies.

For example, automatically enrolling employees in a 401k plan and asking them to opt out, rather than offering them the opportunity to do so, is one example of a nudge aimed at encouraging better and more consistent retirement savings. Another is making organ donation a standard practice by requiring people to indicate whether they would like to donate when registering for their driver's license.

Gambling (Trading) for Excitement

Thaler and Sunstein use the formal term "libertarian paternalism" to describe situations designed around nudges. In Thaler's words: "If you want people to do something, make it easy."

The availability heuristic is the idea that people often rely on information that is easy to recall, rather than actual data, when assessing the likelihood of a particular outcome. For example, if people have read about shark or bear attacks, they may assume that these are common causes of death, when in fact such incidents are very rare.

Bounded rationality refers to the fact that people have limited cognitive capacity, information, and time, and will not always make the "right" choice from an economist's point of view, even if information that points to a particular course of action is available.

Trading to Win, and Not Trading a System

This may be because they are unable to synthesize new information quickly, they may ignore the information and choose "by gut feeling," or they may not have time to fully investigate all options. The term was coined in 1955 by Nobel laureate and University of Chicago alumnus Herbert A. Simon (AB'36, It was coined by Thaler, PhD'43.

Bounded self-interest is the idea that people are often willing to choose outcomes that are not optimal for themselves if it means helping others. Giving to charity is an example of bounded self-interest, as is volunteering. Although these are common activities, they do not fit into traditional economic models.

Border will power is the idea that even if you know the optimal choice, people often give priority to the most profitable ones in the short term, rather than moving forward to lon g-term goals. be. For example, even if you know that exercising is useful for achieving fitness goals, you may say "Let's start tomorrow" and procrastinate it forever.

Avoiding loss is the idea that people dislike losses rather than trying to make a profit. For example, losing a $ 100 bills may be more painful than finding a $ 100 bill.

Is Investing Basically Gambling?

Prospect theory is a series of empirical observations conducted by Carneman and Tewelsky (1979). Carneman and Toversky have asked how people react to some virtual situations, including winning or losing, and enabled human economic behavior. Loss avoidance is the key to prospect theory.

Is Gambling a Smart Way to Make Money?

Sunk cost errors are the idea that even if there is a risk that loss will increase, people continue to invest in a losing project because they are already investing in large amounts.

Is It Better to Invest Than Gamble?

Mental accounting is the idea that people have different ways of thinking about money depending on the situation. For example, if the price of gasoline drops, you may start buying premium gasoline, but you will eventually use the same amount, rather than using the drop in the price.

The Bottom Line

Colly Mitchell (CMT) is the founder of Tradethatsuing. com. Since 2005, he has been active as a professional day trader and swing trader. Corie is an expert in stock, FX and futures price action trading strategies.

Updated October 09, 2023

What a Stock Split Is, Why Companies Do It, and How It Works, With an Example

Reviewer

Reviewer: Marguerita Cheng Smith is an important concept of classical economics and neoclassical economics, and is well known for the "invisible hand" concept that if each individual makes selfish decisions, the whole economy is led by prosperity. I am. However, he also recognized that he often overstook his abilities, feared losing rather than winning, and tend to pursue shor t-term profits than lon g-term profits. These concepts (overconfidence, avoidance, sel f-control) are the basis of today's behavioral economics. Fact check

Fact check: Michael Logan

This classic example shows that avoiding $ 1, 000 losses means gaining $ 1, 000, and people are more willing to take a great risk, which is more willing to take great risks. Contracolty with expected utility theory. Professional theory and other studies by Tevelsky and Carneman continue to influence many fields of behavioral economic research today. close

Gambling is defined as betting something on a contingency, i. e., putting money on something that has an uncertain and potentially negative outcome. However, when it comes to trading, gambling is much more complicated than the definition suggests. Many traders gamble without even realizing it. They trade in ways and for reasons that are completely at odds with succeeding in the market.

In this article, we look at the hidden ways in which gambling creeps into trading practices and the stimuli that may drive an individual to trade (and gamble) in the first place.

For example, Serler gave up watching sports with a friend for blizzards. But if they bought a ticket on their own, the price of the ticket would have been the same, and the danger of driving in the snowstorm did not change, but they would have gone. This is an example of a "penalty error". Regarding a personal invested project, the idea is that even if it means more risk, people do not want to give up much. If you trade for excitement or social proof, rather than trading logically, you are likely trading in a gambling style.

People who trade only to win are likely gambling. Traders with a "must win" attitude often fail to recognize losing trades and withdraw from positions.

What Is a Stock Split?

People who believe they do not have gambling tendencies are likely not willing to admit that they do have gambling tendencies if they find that they are actually acting on gambling urges.

However, discovering the underlying motivation behind your behavior can change the way you make decisions going forward.

Key Takeaways

• Before we delve into the gambling tendency when actually making a trade, there is a tendency that is present in many people even before the trade is made. This same motivation continues to have an impact as traders gain experience and become regular market participants.
• Some people who are not interested in trading or investing in financial markets are driven to do so by social pressure. This is especially common when a large number of people are talking about investing in the market (often during the tail end of a bull market). People feel pressured to conform to their social circle. Therefore, they invest to avoid belittling or ignoring the beliefs of others and feeling left out.
• Making any trade to appease social forces is not gambling in itself if people actually know what they are doing. However, making financial transactions without having solid investment knowledge is gambling. Such a person has no knowledge of controlling the profitability of their choices.
• There are many variables in the market, and when misinformation circulates among investors and traders, it creates a gambling scenario. Until knowledge is developed that can overcome the odds of losing, a gamble is made with every trade.

If you or someone you know has a gambling problem, call the National Council on Problem Gambling helpline at 1-800-522-4700 or visit NCPGambling. org/Chat to chat with a helpline expert.

Once you enter the financial markets, there is a learning curve, and based on the social proof discussion above, it may seem like it is gambling. This may or may not be true depending on the person. It is how one approaches the markets that determines whether they become a successful trader in the financial markets or remain a gambler forever.

The following two characteristics (among many others) are often overlooked but contribute to a trader's tendency to gamble.

Forward Stock Splits

Even losing trades can stir emotions, a sense of power, and satisfaction, especially when associated with social proof. If everyone in a person's social circle is losing in the market, losing on a trade allows the person to join the conversation with their story.

How Stock Splits Work

Those who trade for excitement or social proof are likely trading in a gambling style rather than in a reasoned and tested way. Trading in the market is exciting and connects you to a global network of traders and investors with different ideas, backgrounds and beliefs. But getting caught up in the "idea" of trading, excitement and emotional highs and lows is likely to get in the way of systematic and reasoned action.

Speculation involves high-risk investments, but the expected return is positive. The expected return of gambling is always negative for the player, although some may get lucky and win in the short term.

In any odds-based scenario, it is important to trade in a reasoned and systematic way. Trading to win seems like the most obvious reason to trade. After all, why trade if you can't win? But there is a hidden and harmful flaw when it comes to this belief and trading.

While making money is the desired overall outcome, trading to win can actually take you even further away from making money. If winning is your primary motivation, the following scenario is likely to unfold:

Taylor buys a stock that he feels is oversold. The stock continues to fall, and Taylor is in a negative position. Instead of realizing that the stock is not simply oversold and that something else must be going on, Taylor holds on in the hope that the stock will bounce back, and wins (or at least breaks even) on the trade. The focus on winning puts the trader in a position where he cannot get out of a bad position.

Why Do Companies Split Their Stocks?

Good traders lose many times, but they admit their mistakes and limit their losses. You don't have to win on every trade, and many trades can be profitable by cutting your losses when you know you should. Holding a losing position after the initial entry conditions have changed or turned negative means the trader is gambling and no longer using a sound trading technique (if they ever did).

Investing is the act of putting capital into an asset, such as a stock, in the hope of earning an income or profit. Gambling, on the other hand, is betting money on an uncertain outcome that is statistically likely to be negative. A gambler owns nothing, whereas an investor owns the stock of the underlying company.

Statistically, gambling is not a smart way to make money. The odds are against the gambler, and the house has a built-in mathematical advantage that grows over time. It is possible to win big payouts or to mitigate risk through selective play based on research and odds, but overall, most gamblers end up losing money.

While both minimize risk and reap rewards, the investor's odds are generally higher than the gambler's. In gambling, the house has an edge, or statistical advantage, over the gambler, and that advantage grows the longer you play. Gamblers can still win big money, but they are more likely to end up losing. Investing can produce big losses, but the stock market generally grows higher over time, and the longer you stay invested, the higher the odds of being ahead of the gambler.

1. The tendency to gamble goes much deeper than many people initially realize, and goes far beyond the standard definition. Gambling can take the form of a need to prove oneself socially or to behave in a way that is socially acceptable, resulting in behavior in areas about which one knows very little.
2. Gambling in the market is often seen by those who are gambling for emotional excitement received from market excitement and behavior. Ultimately, relying on emotional and victory attitudes to generate profits rather than trading with a wel l-equipped test system means that the person is gambling in the market and many transactions. It indicates that it is unlikely to succeed.
3. Peter Gratton (M. A. P. P. P., Ph. D.) is a New Orlean s-based editor and professor and has more than 20 years of experience in investment, risk management, and public policy. He has been in charge of marketing at MULTEX (Reuters), expanding his field of investment, ethics, public policies, health and travel industries.
4. Updated September 12, 2024
5. Review author
6. Reviewer: Gordon Scott

Gordon Scott has been an active investor and technical analyst for over 20 years. Certified Market Technician (CMT).

Investor Stock Price Preferences

Fact check

1. Fact check: Suzanne Kvillehagu
2. Content marketer, writer, fact checker. Acquired a finance science person at Bridge Water State University and engaged in financial brand content strategy development.
3. Invested Pedia / Lara Antal
4. close
5. Definition
6. A share split is a corporate action in which a company issues additional shares to shareholders and increases the total at the specified ratio based on the shares previously owned by shareholders.
7. When the stock price of Nvidia (NVDA) rises over $ 1, 200 in 2024, the global chip giant has made a confusion of beginner investors. This decision is not limited to Nvidia, but a typical example of a company with a high stock price, which has a wide range of investors, especially private investors who tend to shy away from high stock prices. It becomes easier. "We hope that employees and investors will be more familiar to employees and investors," Nvidia announced the split.

Behavioral Finance Explanations

The stock split is to effectively reduce the price of each stock without changing the market value of the company by dividing the company's shares into multiple shares. This is similar to cutting a cake small. For example, if one share is divided into two shares, investors who have one share of $ 100 will have two shares of $ 50 per share, but the total is the same.

Stock splitting is to increase the number of shares issued by companies to increase the liquidity of the shares.

Although the number of issued shares increases, each stock price is also divided, so the market capitalization of the company has not changed.

The most common division ratio is two shares per share or three shares per share, and multiple shares before split are divided.

The merger is the opposite, which reduces the number of issued shares and increases the stock price.

• As a result, it can increase fluidity (easy to buy and sell stocks) and trading volume. However, stock split does not change the corporate value, but only redistributed to less ownership and more affordable. Furthermore, there are many opinions that the number of investments by institutional investors who see the total investment, not the stock price, is becoming outdated. However, stock splits are still being done to make individual investors a more eas y-t o-reach stock. In addition, the actions of these companies also show the confidence of the management of future growth.
• The following are the reasons why companies choose this strategy, the mystery of the reasons that tend to rise (even though it should not rise), the impact of this change on various stakeholders, and the stock split. We will explain in detail the points that the investors should consider.
• When examining past stock charts, care must be taken because many platforms (not corporate investors sites) automatically correct past stock prices for stock splitations. In other words, stocks that were traded for $ 1000 on a specific day before dividing one share into 10 shares may be displayed in past data to $ 100. Always make sure that the price has been split to avoid misunderstanding of lon g-term price trends.
• The stock split is displayed as a reverse or forward, but if it is used without an adjective, it usually means in order of stock split. The stock split is when companies increase the number of shares issued without changing market capitalization. Each shareholder receives additional shares in proportion to the number of shares held up to that point, but the value of each strain decreases in proportion.
• The main feature of stock splitting is that the number of shares available in the market increases. For example, in the division of two shares per share, one share is divided into two shares, and the number of issued shares is doubled. Similarly, if one share is divided into three shares, the number of shares will tripled. < SPAN> The number of issued shares increases, but the stock price is also divided, so the market capitalization of the company has not changed.

The most common division ratio is two shares per share or three shares per share, and multiple shares before split are divided.

The merger is the opposite, which reduces the number of issued shares and increases the stock price.

Implications for Investors

As a result, it can increase fluidity (easy to buy and sell stocks) and trading volume. However, stock split does not change the corporate value, but only redistributed to less ownership and more affordable. Furthermore, there are many opinions that the number of investments by institutional investors who see the total investment, not the stock price, is becoming outdated. However, stock splits are still being done to make individual investors a more eas y-t o-reach stock. In addition, the actions of these companies also show the confidence of the management of future growth.

The following are the reasons why companies choose this strategy, the mystery of the reasons that tend to rise (even though it should not rise), the impact of this change on various stakeholders, and the stock split. We will explain in detail the points that the investors should consider.

Reverse Stock Splits

When examining past stock charts, care must be taken because many platforms (not corporate investors sites) automatically correct past stock prices for stock splitations. In other words, stocks that were traded for $ 1000 on a specific day before dividing one share into 10 shares may be displayed in past data to $ 100. Always make sure that the price has been split to avoid misunderstanding of lon g-term price trends.

The stock split is displayed as a reverse or forward, but if it is used without an adjective, it usually means in order of stock split. The stock split is when companies increase the number of shares issued without changing market capitalization. Each shareholder receives additional shares in proportion to the number of shares held up to that point, but the value of each strain decreases in proportion.

• The main feature of stock splitting is that the number of shares available in the market increases. For example, in the division of two shares per share, one share is divided into two shares, and the number of issued shares is doubled. Similarly, if one share is divided into three shares, the number of shares will tripled. Although the number of issued shares increases, each stock price is also divided, so the market capitalization of the company has not changed.
• The most common division ratio is two shares per share or three shares per share, and multiple shares before split are divided.
• The merger is the opposite, which reduces the number of issued shares and increases the stock price.
• As a result, it can increase fluidity (easy to buy and sell stocks) and trading volume. However, stock split does not change the corporate value, but only redistributed to less ownership and more affordable. Furthermore, there are many opinions that the number of investments by institutional investors who see the total investment, not the stock price, is becoming outdated. However, stock splits are still being done to make individual investors a more eas y-t o-reach stock. In addition, the actions of these companies also show the confidence of the management of future growth.
• The following are the reasons why companies choose this strategy, the mystery of the reasons that tend to rise (even though it should not rise), the impact of this change on various stakeholders, and the stock split. We will explain in detail the points that the investors should consider.

When examining past stock charts, care must be taken because many platforms (not corporate investors sites) automatically correct past stock prices for stock splitations. In other words, stocks that were traded for $ 1000 on a specific day before dividing one share into 10 shares may be displayed in past data to $ 100. Always make sure that the price has been split to avoid misunderstanding of lon g-term price trends.

The stock split is displayed as a reverse or forward, but if it is used without an adjective, it usually means in order of stock split. The stock split is when companies increase the number of shares issued without changing market capitalization. Each shareholder receives additional shares in proportion to the number of shares held up to that point, but the value of each strain decreases in proportion.

Key Dates in a Stock Split

The main feature of stock splitting is that the number of shares available in the market increases. For example, in the division of two shares per share, one share is divided into two shares, and the number of issued shares is doubled. Similarly, if one share is divided into three shares, the number of shares will tripled.

• With the increase in the number of shares, the stock price per share is revised downward according to the split ratio. In other words, when one share is divided into two shares, the $ 100 strain of $ 100 before split will be $ 50 after split. When one share is divided into three shares, the $ 90 stock before split will be $ 30 after split.
• Despite these changes, investors' total shares are constant. The decline in stock prices per share accurately offset the increase in the number of shares. This principle is also applied to the market capitalization of the company, and the market capitalization does not change before and after splitting (excluding market fluctuations). The total amount of shares held by all shareholders should not change, and the market value of the company will be maintained.
• If a company performs a stock split, its process is seamless to shareholders. The added shares are automatically deposited by the securities company to the account of shareholders.

Share split does not essentially change corporate value, but can affect market awareness and liquidity. Dividing the stock price can make it easier for small investors to obtain shares and expand the shareholders. In addition, the increase in the number of shares can improve market liquidity and make it easier for investors to buy and sell shares.

If it is a completely efficient market, stock split should not affect the market capitalization of the company or the assets of investors. The market capitalization, the share ratio of individuals, and the basic value of the company remain the same. It is often compared to cutting pizza, but the number of pieces increases, but the number of pizza does not increase.

Advantages and Disadvantages of Stock Splits

• However, stock splits often have shor t-term abnormal returns, and surveys have consistently indicated that corporate value rises from 2 % to 4 % before and after the division announcement. In other words, after the announcement of the stock split, the average split shares tend to be more expensive to its fundamental value. This phenomenon has been called "Announcement Premium" and has been studied for decades by financial researchers.
• Regarding Reverse Split, researchers have found that the stock price tends to fall below Fundamental Value in the short term, opposite to the forward Split's announcement premium).
• Several duplicate explanations are proposed: < SPAN> The stock price per share is revised downward according to the split ratio. In other words, when one share is divided into two shares, the $ 100 strain of $ 100 before split will be $ 50 after split. When one share is divided into three shares, the $ 90 stock before split will be $ 30 after split.
• Despite these changes, investors' total shares are constant. The decline in stock prices per share accurately offset the increase in the number of shares. This principle is also applied to the market capitalization of the company, and the market capitalization does not change before and after splitting (excluding market fluctuations). The total amount of shares held by all shareholders should not change, and the market value of the company will be maintained.

• If a company performs a stock split, its process is seamless to shareholders. The added shares are automatically deposited by the securities company to the account of shareholders.
• Share split does not essentially change corporate value, but can affect market awareness and liquidity. Dividing the stock price can make it easier for small investors to obtain shares and expand the shareholders. In addition, the increase in the number of shares can improve market liquidity and make it easier for investors to buy and sell shares.
• If it is a completely efficient market, stock split should not affect the market capitalization of the company or the assets of investors. The market capitalization, the share ratio of individuals, and the basic value of the company remain the same. It is often compared to cutting pizza, but the number of pieces increases, but the number of pizza does not increase.
• However, stock splits often have shor t-term abnormal returns, and surveys have consistently indicated that corporate value rises from 2 % to 4 % before and after the division announcement. In other words, after the announcement of the stock split, the average split shares tend to be more expensive to its fundamental value. This phenomenon has been called "Announcement Premium" and has been studied for decades by financial researchers.

Advantages of a Stock Split

Regarding Reverse Split, researchers have found that the stock price tends to fall below Fundamental Value in the short term, opposite to the forward Split's announcement premium).

Several duplicate explanations are proposed: As the number of shares increases, stock prices per share are revised down according to the split ratio. In other words, when one share is divided into two shares, the $ 100 strain of $ 100 before split will be $ 50 after split. When one share is divided into three shares, the $ 90 stock before split will be $ 30 after split.

Despite these changes, investors' total shares are constant. The decline in stock prices per share accurately offset the increase in the number of shares. This principle is also applied to the market capitalization of the company, and the market capitalization does not change before and after splitting (excluding market fluctuations). The total amount of shares held by all shareholders should not change, and the market value of the company will be maintained.

If a company performs a stock split, its process is seamless to shareholders. The added shares are automatically deposited by the securities company to the account of shareholders.

Disadvantages of Stock Splits

Share split does not essentially change corporate value, but can affect market awareness and liquidity. Dividing the stock price can make it easier for small investors to obtain shares and expand the shareholders. In addition, the increase in the number of shares can improve market liquidity and make it easier for investors to buy and sell shares.

If it is a completely efficient market, stock split should not affect the market capitalization of the company or the assets of investors. The market capitalization, the share ratio of individuals, and the basic value of the company remain the same. It is often compared to cutting pizza, but the number of pieces increases, but the number of pizza does not increase.

However, stock splits often have shor t-term abnormal returns, and surveys have consistently indicated that corporate value rises from 2 % to 4 % before and after the division announcement. In other words, after the announcement of the stock split, the average split shares tend to be more expensive to its fundamental value. This phenomenon has been called "Announcement Premium" and has been studied for decades by financial researchers.

Regarding Reverse Split, researchers have found that the stock price tends to fall below Fundamental Value in the short term, opposite to the forward Split's announcement premium).

Several duplicate explanations are proposed:

Example of a Stock Split

Best Trading Range: Companies divide stocks to maintain stock prices within the best range that seems to be a best range that balances the needs of various types of investors. In other words, a specific price may look strange or out of the investor.

Lower prices attract more investors: The lower the stock price after split is easier for individual investors.

Mobile hypothesis: As we have seen so far, there are many opinions that the lower the stock price after split, the higher the liquidity, attracting many investors, and increases the trading volume.

Signaling theory: The stock split functions as a signal for a positive outlook from inside the company. Management may have shown expectations for continuous growth and stock prices.

Calculating the Stock Splits in a Company's History

Attention hypothesis: stock split can attract the attention of media and analysts, increase name recognition, and increase stock demand.

Example: Walmart's May 1971 Stock Split

Tick ​​size hypothesis: In a market where the minimum width of Tick is fixed, stock split can effectively increase the relative tic size, bring profits to market manufacturers, and improve fluidity.

• Share split can affect optional contracts. When a stock split is performed, the optional exercise price and the number of contracts are usually adjusted to maintain the same total amount. When holding options at the time of stock splitting, it is necessary to carefully consider how your contract is affected.
• Research has been published for a long time that investors prefer a specific name price range, and companies may be compatible with such name price range through stock splitting. Investors, including investors, have shown that investors generally prefer $ 10 to $ 50 per share. However, these good choices vary depending on the market and times. The following is a summary of the survey results related:
• Stock prices may be too low: Some institutional investors have a policy opposing the purchase of "Penny shares" (generally referred to stocks that are traded for less than $ 5), so it is less than $ 5. The price is often resistant.
• Stock prices may look expensive: more than $ 100 is often seen by individual investors, despite having nothing to do with the fundamental value of the stock.

Historical consistency: The average stock price on the New York Stock Exchange is surprisingly constant from around $ 30 to $ 40 from the 1930s to the 2000s, suggesting that this range is lon g-term. I'm doing it.

1. Market differences: The preferred range varies from market to market. For example, in some Asian markets, lower nominal prices (even if it is less than $ 1) is common and accepted.
2. Recent trends: With the rise of fractional share investing, some companies have been able to raise their stock prices well above $1, 000 without splitting. However, many companies still aim for the traditional $20 to $50 range.
3. Post-split target price: When splitting stock, the post-split target price is often around $30 to $50.
4. Reverse splits: Many companies use reverse splits to raise their stock price to $5 or $10 or more to avoid delisting and to increase favorability among institutional investors.

Will a Stock Split Affect My Taxes?

A lower post-split price seems psychologically more attractive to some investors, even though the fundamental value of the company has not changed. This is related to a concept called the "nominal price illusion," which is like the "money illusion," and which says that investors have a cognitive bias that makes them see a lower-priced stock as more valuable, even if the stock's fundamentals have not changed.

Are Stock Splits Good or Bad?

This preference is not rational in a purely economic sense, because the nominal price should not matter. Behavioral finance researchers are particularly interested in stock split anomalies because they challenge the efficient market hypothesis.

Does the Stock Split Make the Company More or Less Valuable?

Behavioral finance argues that people often make financial decisions based on emotions and cognitive biases, rather than rational trading decisions. For example, loss aversion means that investors often hold on to losing positions rather than feel the pain of incurring a loss.

Do Mutual Funds Split like Individual Stocks?

In addition to a slight boost between the announcement and the split, researchers have commonly found a "post-split drift." This means that after a significant corporate event (a stock split or other corporate announcement), there is a residual impact when, all things being equal, there should be no impact. This drift means that stock prices rise slightly after a stock split. Traders and experts have been curious to know why.

The Bottom Line

Behavioral finance experts have argued that cognitive biases contribute to the announcement premium:

Anchoring bias: Investors may anchor to the pre-split stock price and perceive the post-split stock price as "cheaper."