Abstract

https://ssrn.com/abstract=2613702
 


 



A Tough Act to Follow: Contrast Effects in Financial Markets


Samuel M. Hartzmark


University of Chicago - Booth School of Business

Kelly Shue


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

July 15, 2016


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.

Number of Pages in PDF File: 58

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

JEL Classification: G02, D03, G14


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Date posted: June 3, 2015 ; Last revised: January 20, 2017

Suggested Citation

Hartzmark, Samuel M. and Shue, Kelly, A Tough Act to Follow: Contrast Effects in Financial Markets (July 15, 2016). Available at SSRN: https://ssrn.com/abstract=2613702 or http://dx.doi.org/10.2139/ssrn.2613702

Contact Information

Samuel M. Hartzmark
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Kelly Shue (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://https://sites.google.com/site/kellyshue/

Chicago Booth School of Business Logo

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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