Thinking about Prices versus Thinking about Returns in Financial Markets
112 Pages Posted: 20 Mar 2016 Last revised: 6 Nov 2018
Date Written: October 26, 2018
Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies with subjects having various levels of expertise, amount of information, and 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
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