Illumination or illusion? Placebic information and stock price forecasts

Meta-studies show that stock returns and, as a consequence, future stock prices are mainly determined by a stock’s beta factor, a momentum factor, and few value and profitability factors. All relevant information to determine these factors is included in past stock prices and the company’s financial statements. Other company data, such as the number of employees, are to be considered irrelevant for the stock prices and, therefore, irrelevant for investors. Langer et al. (1978) refer to this type of irrelevant data as “placebic information”. When making investment decisions, retail investors commonly receive a considerable amount of placebic information from financial advisors, analyst reports, or Key Investor Information Documents.

The purpose of our study is to analyze how investors perceive placebic information and whether placebic information influences investors’ stock price estimates. We initiate a questionnaire-based stock price forecast competition. 196 undergraduate business students that participated in an introduction to finance course are asked to estimate the stock price in three months’ time and an upper and lower bound of the stock price that will not be exceeded or undercut with more than five percent probability, respectively, within the next three months.

The forecast competition covers three stocks. In addition to varying the amount of information between the stocks, they exhibit a different price pattern displayed in the price chart, i.e. upward, downward, or sideways. The three participants with the most accurate estimate per stock received a prize money when the actual stock prices were realized after three months. For each stock, participants are also asked to assess whether they received all relevant information necessary to accurately forecast the stock price. Moreover, participants are asked to estimate the probability that they receive a prize in the competition. In addition, the questionnaire includes items to capture further participant characteristics including participants’ financial knowledge, self-assessed knowledge in statistics, overconfidence, risk attitude, cognitive reflection, and Big Five personality factors.

Our participants are subject to an information-illusion as they perceive placebic information as actually relevant information. With an increasing amount of placebic information, participants state to have significantly more relevant information available to accurately forecast the stock price although the amount of perceived relevant information has no significant influence on participants’ stock price estimates and their accuracy. In contrast, participants state a lower probability to win a prize in the competition for the stocks with placebic information, which means that they expect a lower payoff.