70 Pages Posted: 20 Mar 2016 Last revised: 20 Nov 2016
Date Written: November 17, 2016
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: 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
By Heiko Jacobs