Speculative Behavior of Institutional Investors

A survey compared speculative behavior in two groups of institutional investors. The "experimental" group held stocks that had shown extraordinary price increases over the preceding year that also had high price earnings ratios. The control group held randomly selected stocks. In Shiller and Pound [1986] we argued that the survey results gave some support to some diffusion or epidemic models for interest in the stocks in the experimental group. Here, we show that the two groups are similar in describing their investment strategy as relating to a theory about fundamental value rather than about the kind of stocks that are becoming attractive to investors. However, the experimental group is less likely to make explicit comparisons of price with measures of fundamental value, and differs from the control group in their attitudes toward timing, price changes, and short-term earnings disappointment. Overall, these results appear consistent with the notion that price changes unrelated to fundamentals may be caused by contagious enthusiasm about fundamentals amongst institutional investors. The holding patterns of those experimental group investors who said that they were unsystematic in their stock choice are studied. These investors tended to show gradually increasing holdings over the period of stock price increase. Reasons respondents gave for the gradual increase are discussed.