Image is everything. We are bombarded with advertising images on radio, television, and more recently, on our computer screens. These images work on both conscious and subconscious levels. We see an attractive model next to a racy new sports car and the message is that we too can have a desirable mate if we buy the new car. Sometimes we aren’t entirely aware of how these powerful images may influence our behaviour.
In a classic psychology study, for example, Dr Robert Zajonc demonstrated that mere exposure to an image increased subjects’ preference for it. The more we see an image, the more we like it. The image of a company or stock can also have an impact on our trading decisions. Whether it is seeing commercials touting how a company is changing the world on Sunday morning talk shows or just financial analysts talking up a stock, these images impact our preference for the stock. Upon seeing these advertising images, we may irrationally believe the stock has more growth potential than it actually does.
A study by Dr Donald MacGregor and colleagues illustrates how the image of a company can bias decision-making. The better the company image, the higher the perceived growth potential. In their study, a group of advanced business students was asked to make decisions regarding a set of industry groups on the New York Stock Exchange. Examples of the industry groups were computer software, pharmaceuticals, railroads, and managed care.
Unknown to the participants, half of the industry groups consisted of high performing stocks (greater than 20% return) while the other half consisted of low performing stocks. Participants rated each industry group on whether they had a positive (for example, value, activity, and strength) versus negative image.
They were also asked to estimate the rate of return for each industry group. The more highly an industry group was rated on value, activity, and strength, the higher the estimated return. However, a company’s image had no relation to actual market performance, as measured by weighted average returns for the industry group. In other words, participants let the image of the company influence their forecasts.
This study shows how images can have a powerful influence on our decisions. We encounter many images in our everyday lives, and it’s essential that we identify the potential influence of these images on our judgments. Don’t let these images bias your price forecasts. Be aware that, sometimes, you may have a positive image of a company that may override your logic. Try to minimize the influence of these attitudes. Reevaluate your trading plan and make sure that you are basing your decisions on specific evidence, rather than hype or image.