Abstract/Description

In this paper, I investigate the effects of group acronyms as heuristic devices among financial investors. I analyze the consequences of the narratively constructed categorization into the BRICS group (Brazil, Russia, India, China, and South Africa). I suggest and test the hypothesis that investors use categories as a heuristic shorthand which, in turn, affects their allocation decisions. I argue that this is due to two main behavioral tendencies on the part of investors: the representativeness bias and the availability bias. The paper examines the process through which these countries came to be grouped together in international media and then explores the contagion effect in sovereign bond markets during the period 2004-2020. Unlike other investment acronyms (e.g. PIIGS), the BRICS acronym contains a positive connotation. Consistent with this interpretation, I show how the number of articles containing the acronym BRICS in reference only to the other countries in the group decreases the bond spreads of a given country beyond what political conditions and economic fundamentals would predict. The results show that Brazil, Russia and, to a lesser extent, India have reaped substantial benefits from being labeled as BRICS. Consistent with the theoretical expectations, the heuristic BRICS effect is stronger when investors face greater uncertainty, when international capital is scarce, and when the country in question is more dependent on external financing.