Download this Paper Open PDF in Browser

A Tough Act to Follow: Contrast Effects in Financial Markets

61 Pages Posted: 3 Jun 2015 Last revised: 4 Oct 2017

Samuel M. Hartzmark

University of Chicago - Booth School of Business

Kelly Shue

Yale School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 21, 2017

Abstract

A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.

Keywords: contrast effects, behavioral economics, relative thinking, financial markets

JEL Classification: G02, D03, G14

Suggested Citation

Hartzmark, Samuel M. and Shue, Kelly, A Tough Act to Follow: Contrast Effects in Financial Markets (September 21, 2017). Available at SSRN: https://ssrn.com/abstract=2613702 or http://dx.doi.org/10.2139/ssrn.2613702

Samuel Hartzmark

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Kelly Shue (Contact Author)

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Paper statistics

Downloads
1,393
Rank
10,554
Abstract Views
3,918