When customers are investors.

WHEN THE BOX CONTAINing my order of dress shirts arrived, I found an extra item inside: a nicely printed card inviting me to consider investing in the company's stock.

Not long afterward, I noticed that Cracker Barrel had included on its tabletops a similar message. Right next to the golf-tee game was a stand-up promotional piece with Cracker Barrel's description, growth plans and ticker symbol.

Several public companies--particularly those marketing directly to consumers--have decided that their customers might be mined as investors, too. It's the ultimate cross-sell: You like our products and stores, so get yourself a piece of the action. It's also a proactive attempt to manage, at least to some degree, the composition of the investor base.

This trend dovetails with recent research in finance that shows the degree to which investors follow less-than-ideal patterns and make less-than-perfect choices. For example, professor Terrance Odean of the University of California-Berkeley has led a very interesting program of research on the behavior of investors. Based upon examinations of trading data from several brokerage firms, Odean has concluded that investors show several powerful (and ultimately expensive) biases. I'll discuss two.

First, because they're generally overconfident, investors tend to trade too often. Odean examined the trades of more than 10,000 investors at one large discount trading firm, only including the instances when an investor sold one stock at a profit and replaced it with another within three weeks; he wanted to eliminate reasons besides pure speculation for trades, including tax-motivated selling and trades for raising liquidity. Odean found that the stocks investors purchased underperformed the ones they sold by about 5 percent over the subsequent 12 months (and that did not include commissions).

Second, because of our limited attention span, investors tend to "follow the action." In a study of mutual funds, Odean and professor Brad Barber found that 39 percent of the purchases were made in the 10 percent of funds that had performed best the prior year. (Numerous studies show that a single year's performance tells you little about a money manager's ability, by the way.)

Why do investors trade this way? Investors have what researchers call a "search problem" when it comes to picking stocks to buy. There are several thousand stocks from which to choose, and none of us is cognitively equipped to deal with that many options. (Selling stock doesn't involve a search problem, because your list of potential stocks to sell is limited to the ones you already own.) So, many individual investors only consider the stocks that catch their attention, be it from a recent and abrupt change in price, publicity about the company or promotion.

I think this final point is particularly interesting, and it relates to some developing research. With UALR colleagues Andy Terry and Ashvin Vibhakar, I am examining the nature of investing expertise and whether experts tend to examine different information about companies than do relative novices. Some of our very preliminary results suggest they do.

In a survey that included financial experts, true novices and people in the middle, we found that some company attributes that are influential among relative novices are not as important to experts. For example, shown a list of 15 potential factors that might determine a company's share value ("management quality," "number of new products," etc.), the novices rated "advertising effectiveness" and "advertising expenditures" to be significantly more important than did the experts. Our hypothesis has been that the non-experts give greater weight in their picks to information, like advertising, that is both memorable and easy to understand.

What are the implications of all this? If you're an investor; recognize how these very common biases and shortcuts apply to your own decisions. Take steps to minimize the effect of your overconfidence and limited attention span. If you're involved in managing a public company, note how the power of publicity and advertising can extend beyond the product markets and into the equity markets. Finally, if you're involved in sales, marketing or advisement within the financial-services industry, understand that the relative expertise of your clients may be a powerful driver of their behavior.

Jim Karrh, Ph.D., is associate professor of marketing and advertising in the University of Arkansas at Little Rock's College of Business and senior consultant with CJRW Executive Strategies in Little Rock. E-mail him at [e-mail].