More and more research is being done on behavioral finance in an effort to understand how investors think. Research has already revealed that losses hurt. In comparing emotional responses of losses and gains, losses generate stronger emotions.

This explains why investors often hang on to losers and sell winners too soon. This aspect of behavioral finance is well known. A less well known example of the research is the streetlight effect, a type of observational bias that occurs when people only search for something where it is easiest to look.

You might be familiar with a famous explanation of the bias. That explanation is also where the name comes from. The streetlight effect is also called a drunkard’s search, after the joke about a drunkard who is searching for something he has lost:

“A policeman sees a drunk man searching for something under a streetlight and asks what the drunk has lost. He says he lost his keys and they both look under the streetlight together. After a few minutes the policeman asks if he is sure he lost them here, and the drunk replies, no, and that he lost them in the park.

The policeman asks why he is searching here, and the drunk replies, “this is where the light is”.

That story has been around for almost 100 years and was noted by researchers as early as 1964, when Abraham Kaplan cited “the principle of the drunkard’s search” in The Conduct of Inquiry: Methodology for Behavioral Science.

Looking Where the Light Isn’t Bright

Investors are affected by this bias when they look only at data from publicly traded companies. This data is easy to find since it is contained in SEC filings and various web sites and data bases. However, there are a number of nonpublicly traded companies and they can offer valuable insights into stocks as well.

One example of this type of insight is found in a recent report on the timeshare industry. The question that began the research was whether or not the industry will be hurt by higher interest rates.

Mike Flaskey, CEO of the private company Diamond Resorts, says his firm is “very bullish” and aims to keep expanding in hot leisure destinations such as Hawaii.

Diamond Resorts “offers destinations, events and experiences to help members make a habit of breaking from the routine. From unforgettable getaways to exclusive concert series to VIP receptions and dinners, members turn to Diamond to recharge, reconnect and remind each other what matters most.”

Diamond Resorts had traded on the NYSE from its July 2013 debut until September 2016, when private equity giant Apollo Global Management completed its $2.2 billion acquisition.

The company’s bullishness is illustrated by its recent $225 million purchase of The Modern Honolulu in Oahu. Diamond will upgrade it to meet customers’ demands for luxury-style suite accommodations that feature full-size kitchens and one- or two-bedroom formats.

“It’s a four-star property. We’re going to go through it floor by floor,” Flaskey recently told IBD during an interview at the Milken Institute Global Conference in Beverly Hills, Calif.

Flaskey said that Diamond Resorts generates roughly $100 million in annual sales centered on its collection of membership-based hotels across the entire Hawaiian isles. While Las Vegas is Diamond’s top sales market, Flaskey believes Hawaii will in time take the top spot.

One leg of Diamond’s business is financing the purchase of customers’ points-based time share ownership. Flaskey says the typical customer makes a 15% down payment on an average transaction of $24,000. Then he or she borrows to pay off the rest via a loan from Diamond.

“Middle America is our customer. The usual household income is between $110,000 and $140,000,” Flaskey said. “They are very comfortable with making a regular payment” to fund the buy. Plus, 30% of Diamond’s customers pay off the outstanding loan before maturity.

Applying This Information to Publicly Traded Companies

Understandably optimistic, Flaskey expects the total public market value of timeshare companies to reach nearly $37 billion within a couple of years. That’s up nearly fourfold since the fall of 2013, when Diamond Resorts and competitor Marriott Vacations Worldwide (NYSE: VAC) totaled less than $10 billion in market cap.

Flaskey’s comments also can help investors gain insights into publicly traded hotel companies like VAC. That stock is pulling back after a strong run.

The pullback came after VAC announced plans to buy ILG (Nasdaq: ILG), which operates the Interval International “exchange network” allows timeshare owners the opportunity to access other properties. VAC now trades at less than 15 times next year’s expected earnings.

Exploring Hotel Stocks

Hotels can be thought of as an alternative to timeshares since many consumers will simply use a hotel for a vacation spot. Several companies in that industry are market leaders.

Hyatt Hotels (NYSE: H) appears to be breaking out of a consolidation pattern and could be set up for its next move up.

While the strong has strong technicals, value investors might be concerned by the company’s price to earnings (P/E) ratio of 42 based on next year’s expected earnings.

Hilton Worldwide (NYSE: HLT) also displays a strong technical pattern with a wider consolidation setting up what could be a large move higher.

This stock is also richly priced with a P/E ratio of about 26 and a price to book (P/B) ratio of more than 15 indicating there is little room for error on the company’s part.

Marriott (Nasdaq: MAR) is priced at about 21 times its expected earnings, a reasonable valuation given the stock’s expected earnings growth rate of nearly 20% a year.

Aggressive investors should consider China Lodging (Nasdaq: HTHT).

The diversified hotel chain broke the $1 billion sales barrier in 2017, growing the top line by 25% to $1.22 billion. China Lodging earned a record $2.66 a share last year, up 46%. Estimates are not available for the company.

In a strong economy, hotels could be among the biggest winners as travel for both business and vacations increases. This is simple to see, but the pointer to the industry comes from an area that is poorly lit at times, the CEO of a privately held company.

If Diamond Resort’s CEO is correct, these hotel stocks could be market leaders over the next few months.

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On Tuesday, as expected, President Trump announced that the U.S. will withdraw from the Iran nuclear deal. The President was clear in saying that he believed Tehran had cheated on the terms of the treaty and used oil revenue to fund terrorism and contribute to growing chaos in the Middle East.

The Middle East is rapidly becoming an important story. In his comments, President Trump indicated that a nuclear arms race was likely in the region. He seemed to have no doubts that Saudi Arabia and other countries will pursue nuclear weapons if the treaty remains in place.

While the President was clear, what happens next is far from clear. Several countries are involved in this agreement and they have not said what they will do. It is possible some European allies will not join the U.S. in re-imposing sanctions.

Oil Is One Market Affected

Oil prices have been rising as speculation that trump intended to withdraw from the agreement mounted.

The gains came even as Iran was racing to generate as much revenue as possible before possible sanctions affected the oil industry.

CNBC reported that Iran’s oil exports accelerated to a recent record in April, indicating Tehran is seeking to maximize revenue ahead of the decision on the 2015 nuclear deal and the possible re-imposition of sanctions.

Exports of crude and condensate — a grade of ultra-light crude oil — hit 2.767 million barrels a day last month, according to data from Tanker Trackers. That was an increase from 2.104 million in March.

Official estimates from Iran’s oil ministry put April’s figure at 2.617 million barrels a day, the highest since implementation of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in January 2016, according to the ministry’s Twitter account.

Now that the decision has been made, it is likely that volatility in the market will increase and it is possible prices will climb even more on concerns about instability in the region.

But, analysts know the picture will become complicated.

Much depends on whether Tehran’s customers would fall into line and comply with U.S. sanctions. Qamar Energy’s Robin Mills said “higher-end estimates” of over 500,000 barrels a day “look excessive given the much lesser international support for sanctions this time.”

Saxo’s analysts added that, assuming “U.S. friendly countries” in Europe, Japan and South Korea cooperate and cut imports from Iran completely, it could amount to 750,000 barrels a day.

“Such an outcome would have a significant impact on global balances and would support current and probably even higher prices.” Saudi Arabia is unlikely to step in with extra barrels unless the spike extends beyond $80 a barrel, he added.

Russia and China, however, “can offer a lifeline” to Iran, according to JTD Energy. “As a major exporter who has successfully coped with U.S.-imposed sanctions for several years, Russia can become a critical ally for Iran.”

Meanwhile, China’s yuan-denominated Shanghai crude oil futures launched in March “may offer Iran a reprieve for surplus crude that can circumvent U.S. financial sanctions and dollar-denominated transactions.”

Time will tell but expect volatility until the facts become clearer.

Stocks Are Also Affected

While oil is the market of most immediate interest, several companies will also be volatile.

Since sanctions were lifted in 2016, some large companies have sought to do business in Iran’s market. Boeing (NYSE: BA), for example, has agreed to sell 80 planes to Iran Air and 30 planes to another Iranian carrier, Aseman Airlines, for a total of about $11 billion at list prices.

Rival Airbus (EADSY) also has a 100-jet, $10 billion deal with Iran that would be complicated by any sanctions that U.S. suppliers face.

These deals could be affected by Trump’s decision. The stock has been pulling back in recent weeks as traders awaited news.

There are several possible outcomes for Boeing. Iran could cancel the deal and ignore any penalties under the contract, claiming sanctions nullify the terms. This could hurt Boeing, especially if the Iranian customers turned to Airbus.

However, Airbus relies heavily on suppliers in the U.S. and sought U.S. approval before completing its own deal. It is unlikely that company could deliver under newly imposed sanctions.

The sever economic consequences could push Iran to the negotiating table, merely delaying the deal from Boeing’s perspective.

Like, oil services companies are considering the impact of Trump’s decision on their new contracts with Iran. Among these stocks is Schlumberger (NYSE: SLB).

This stock has been pulling back recently. The news on Iran will be difficult for traders to price in SLB. The company could be hurt by the potential cancellation of some contracts related to Iranian oil fields but it could benefit from the higher prices sanctions could lead to.

That sums up the effects of the decision to re-impose sanctions. There will be missed effects, especially because it involves so many countries. The original deal was signed by China, France, Germany, Russia and the U.K.

France and Germany have expressed their desire to stay in the deal. They may allow companies to have limited access to Iran. China seems likely to continue working with Iran, according to experts. Russia may follow the U.S. lead.

Russia is fighting a proxy war against Iran in Syria, supporting the government in that country as it battles rebels largely backed by Iran. Russia may welcome financial regulations that make it more difficult for Iran to finance its Syrian operations.

However, wars and conflicts in the Middle East are often fought in low tech ways, with weapons that cost relatively little. So, the sanctions may not help Russia as much as higher oil prices will.

That brings us back to oil, and here the confusion is just as great. Demand for Iranian crude in China and India is likely to remain very strong under the new order. But, companies in Europe, South Korea and Japan are likely to respect the sanctions to some degree.

The Iran decision will have an impact on markets, but the impact may be limited to volatility. Trends will emerge and in the uncertain climate, they may be either up or down. Traders should consider using profit targets as well as stop losses to benefit in volatile times.