Odd lotters were central to a historical theory of technical analysis known as odd lot theory. Odd lot theory was predicated on the belief that one could outperform the stock market by identifying the least-informed investors and making investments opposite to them. (If the least-informed investors were selling, it was generally a good time to buy, and vice versa.)
Assuming that odd lotters were generally smaller investors with little market knowledge, practitioners of odd lot theory identified the actions of odd lotters and did the opposite. The actions of odd lotters were interpreted as contrary signals.
The theory is no longer popular as analysis of data shows little evidence that the method works. According to Princeton University economist Burton Malkiel: "It turns out that the odd-lotter isn't such a stupendous dodo after all. A little stupid? Maybe. There is some indication that the performance of odd-lotters might be slightly worse than the stock averages. However, the available evidence indicates that knowledge of odd-lotters' actions is not useful for the formulation of investment strategies."
The theory was the subject of much analysis in the 1960s and 1970s. By the 1990s, however, the theory had fallen out of use. In addition to the theory's general ineffectiveness, more and more individuals began to invest in mutual funds instead of individual stocks.
The term odd lot existed prior to use in finance and is used outside the financial industry for any irregular packaging in a general and objective sense.
Read more about this topic: Odd Lotter
Famous quotes containing the words odd, lot and/or theory:
“His reversed body gracefully curved, his brown legs hoisted like a Tarentine sail, his joined ankles tacking, Van gripped with splayed hands the brow of gravity, and moved to and fro, veering and sidestepping, opening his mouth the wrong way, and blinking in the odd bilboquet fashion peculiar to eyelids in his abnormal position. Even more extraordinary than the variety and velocity of the movements he made in imitation of animal hind legs was the effortlessness of his stance.”
—Vladimir Nabokov (1899–1977)
“Sure, you can love your child when he or she has just brought home a report card with straight “A’s.” It’s a lot harder, though, to show the same love when teachers call you from school to tell you that your child hasn’t handed in any homework since the beginning of the term.”
—The Lions Clubs International and the Quest Nation. The Surprising Years, II, ch.3 (1985)
“... the first reason for psychology’s failure to understand what people are and how they act, is that clinicians and psychiatrists, who are generally the theoreticians on these matters, have essentially made up myths without any evidence to support them; the second reason for psychology’s failure is that personality theory has looked for inner traits when it should have been looking for social context.”
—Naomi Weisstein (b. 1939)