Originally printed in the Baltimore Sun on Oct. 17, 1989, after U.S. stocks dropped 6.9% on Oct. 13, it still circulates widely on Wall Street. ("The nation's most important financial institution" was the New York Stock Exchange.)
Remarkably, new research suggests that KAL might not just have been using his imagination to make fun of the way investors can turn on a dime for no reason whatsoever. He might also have put his finger on a psychological process that can make investors turn on a dime for a reason they're entirely unaware of.
Hearing or seeing a word that sounds like an action can prime you into taking that action, according to "From Bye to Buy: Homophones as a Phonological Route to Priming," to be published next month in the Journal of Consumer Research. Despite its infelicitous title, the paper may help explain, at least in small part, the mystery at the heart of KAL’s cartoon: How do contagions spread through financial markets?
The study, run by marketing professor Derick Davis at the University of Miami, exposed people to homophones (words that are pronounced the same but spelled differently) like "bye" and "buy."
For example, participants read a short blogpost about travel in Canada that ended either with "Bye bye!" or "So long!" Then they were asked how much they would pay for a name-your-own-price dinner for two at a local restaurant.
Those who had read the version of the blogpost that ended with "Bye bye!" were willing to pay up to 55.5% more than those who read the "So long" version. Merely seeing the word "bye" apparently made them more eager to buy. That was especially true for those who had to memorize a seven-digit number beforehand – the kind of distraction that many experiments have shown can reduce the mind's reliance on logical reasoning.
You should probably buy a few grains of salt to sprinkle onto these findings. Recently, critics have argued that related claims about "priming" or unconscious influences on behavior are fragile and difficult to replicate, while psychologist Uri Simonsohn of the University of Pennsylvania has shown that many similar studies are statistically underpowered.
Prof. Davis, who ran this study, concedes that the effects he found are small. However, he adds, the people in his experiments weren't just college students in a lab but were recruited online from a broader cross section of the population. And, he points out, people often fail to detect the incorrect use of homophones while proofreading, because the identical sound of the wrong word puts them in mind of the right word. (Think of all the times you didn't even notice that you typed "they're" for "their" or "there.")
If "people are distracted by noise, time pressure and other commotion," says Prof. Davis, their behavior may be more easily swayed by the homophone effect. When prompted by the sound "bye," he says, "on average across many people, a small change in 'buying' behavior may be possible." Prof. Davis, emphasizing that this is a speculation, adds that "a distracted investor primed with 'bye' might misremember reading that the stock was rated a 'buy.'"
KAL isn't surprised by the research. "The notion of human behavior being influenced by outside suggested stimuli certainly makes sense," he told me in a recent email. Almost 25 years after he drew his brilliant cartoon, he still gets requests for reprints every week, he says.
The contagious panic that KAL captured in his image was unsettling. On Oct. 13, 1989 – a Friday the 13th – the Dow closed down 190.58 points, or 6.91%. At the time, that was the second-worst point decline (after the October crash of 1987, when stocks fell 23% in a day) and the 12th-worst percentage drop on record. The crash was said to have been triggered by the collapse of takeover bids for airline stocks UAL and AMR, but nearly all the collapse came in the final hour of trading, well after the news that the takeover bids had fizzled.
The next trading day, The Wall Street Journal tried to explain the crash:
One takeover stock speculator says that with individual investors frightened away from the market, the remaining participants are mainly institutions, all with instant access to the same information, and the same ability to sell in an instant – that is, until all try to sell at once.
"If this is something that had happened over the last few weeks, nobody would have noticed," the speculator says. "But now it just happens in an hour. The information is very quick; it's often inaccurate; and reactions can be irrational."
In a guest essay published in the New York Times on Oct. 29, 1989, called "Fear of a Crash Caused the Crash," future Nobel Prize-winning economist Robert Shiller described a survey he had done of 101 market professionals the Monday and Tuesday after the tumble. Asked whether the drop was driven by "a change in the stock market fundamentals" or "psychology and emotion," only 19% cited fundamentals; 77% blamed psychology and emotion. Shiller and his colleague William Feltus also asked the professionals if they thought the latest drop could turn into a replay of the 1987 crash; 35% thought it could, while 41% thought other investors thought so.
So, when KAL poked fun at traders overreacting to what others say, he was right on the money.
To this day, says KAL, brokers buying copies of the cartoon "inevitably" tell him, "It was so funny because it was so true."
So if you walk into a brokerage or financial adviser's office and you hear "Bye Bye Love" and "American Pie" and "Bye Bye Blackbird" playing on the sound system, hang on to your wallet. You may be more easily swayed than you think.
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