Ads of stocks and mutual funds typically tout their past performance, despite a disclosure that past performance does not
guarantee future returns. Are consumers motivated to buy or sell based on past performance of assets? More generally, do consumers
(wrongly) use sequential information about past performance of assets to make suboptimal decisions? Use of this heuristic
leads to two well-known biases: the hot hand and the gambler’s fallacy. This study proposes a theory of hype that integrates
these two biases; that a positive run could inflate prices, while a negative run could depress them, although the pattern
could reverse on extended runs. Tests on two experiments and one event study of stock purchases strongly suggest that consumers
dump “losers” and buy “winners.” The latter phenomenon could lead to hyped-up prices on the stock market for winning stocks.
The authors discuss the managerial, public policy, and research implications of the results.
Keywords heuristics and biases - financial products - behavioral decision theory - judgment and decision making
Joseph Johnson (jjohnson@miami.edu), Ph.D., is an assistant professor of marketing at the University of Miami. His research interests are
studying consumer biases in the context of financial products, measuring stock market response to new product introductions,
and the optimal customization of marketing promotions. His research has appeared in theJournal of Consumer Research and theJournal of Optimization Theory and Applications. His teaching interests are international marketing, marketing strategy, and marketing research.
Gerard J. Tellis (tellis@usc.edu), Ph.D. Michigan, is the Neely Chair in American Enterprise, director of the Center for Global Innovation,
and professor of marketing in the Marshall School of Business at the University of Southern California, Los Angeles. He has
been Visiting Chair of Innovation, Marketing, and Strategy at the Judge Institute of Management, Cambridge University, United
Kingdom and a Distinguished Visitor, Erasmus University, Rotterdam. He specializes in the areas of global innovation, new
product growth, market entry, advertising, sales promotion, and pricing. He has published more than 60 papers and books on
these topics (see http://www-rcf.usc.edu/~tellis/publicat.htm). His articles have won numerous awards, including four of the
most prestigious awards in the field of Marketing: the Frank M. Bass, William F. Odell, Harold D. Maynard (twice), and American
Marketing Association (AMA)-Berry awards. He consults with major multinational corporations and has been on the editorial
review boards of the Journal ofMarketing Research, theJournal of Marketing, andMarketing Science for several years.