Culture and Stock Price Clustering: Evidence from the Peoples' Republic of China

Price clustering is the tendency of prices to be observed more frequently at some numbers than others. It results from human bias and from haziness or imprecise beliefs about underlying value. To many Chinese, the number "8" is salient because it is considered "lucky", while "4" is "unlucky" and to be avoided. We conduct a tightly controlled experiment to determine whether a culturally heuristic number preference exists, by studying trading on the Shanghai and Shenzhen stock exchanges, which have been relatively segmented along cultural lines. Our results are extremely clear. For much of our sample period (1994 - 2002), the prices of A-shares (mostly held by Chinese organisations or individuals) traded on the Shanghai stock exchange were more than twice as likely to end in 8 as 4. Similarly, for A-shares traded on the Shenzhen stock exchange a preference for 8 was found. Preference for 8 on both A-share exchanges was initially very strong, but has dissipated somewhat over time. For the Shanghai A-shares the reduction in the cultural preference only occurred in the most recent period whereas for Shenzhen the reduction occurred considerably earlier. Overall, the cultural preference was widespread for both A-markets and was in fact stronger in opening, high and low relative to closing prices. The preference for 8 was much weaker for B-shares, largely held by foreigners, on both exchanges.