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Thinking about Prices versus Thinking about Returns in Financial Markets

70 Pages Posted: 20 Mar 2016 Last revised: 20 Nov 2016

Markus Glaser

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Zwetelina Iliewa

Centre for European Economic Research (ZEW)

Martin Weber

University of Mannheim - Department of Banking and Finance

Date Written: November 17, 2016

Abstract

Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors make sense of prices and returns in the same way? This paper presents three studies with subjects of varying expertise, with various amounts of information and with different incentive schemes. The results are consistent across all studies: Asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts as opposed to price charts results in lower expectations. Experience is not a useful remedy but Cognitive Reflection mitigates the impact of format changes.

Keywords: expected returns, information presentation, question format, judgmental forecasting, professional forecasters

JEL Classification: D14, D18, G02, G23

Suggested Citation

Glaser, Markus and Iliewa, Zwetelina and Weber, Martin, Thinking about Prices versus Thinking about Returns in Financial Markets (November 17, 2016). Paris December 2016 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=2750064 or http://dx.doi.org/10.2139/ssrn.2750064

Markus Glaser

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

Zwetelina Iliewa (Contact Author)

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

HOME PAGE: http://sites.google.com/view/ziliewa

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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