How Price Path Characteristics Shape Investment Behavior
37 Pages Posted: 13 Dec 2016 Last revised: 22 Sep 2017
Date Written: May 19, 2017
Abstract
Price paths are oftentimes the only graphical representation of financial products investors receive before making an investment decision. We argue that price paths serve as graphical frames, influencing the perceived attractiveness of an asset by highlighting specific asset characteristics. In a controlled experiment we find that price paths have an impact on investment decisions, even if risk-and-return characteristics of an asset are identical. Employing a regression model we relate the perception of price path shapes to several heuristics. These heuristics are: focusing on more recent outcomes, deriving implicit reference prices from focal prices, focusing on losses, and estimating risk from the amplitude of the path. We conclude that investment decisions are systematically biased due to the shape of an asset’s price path.
Keywords: experiment, price paths, behavioral investment choice, reference point, attribute framing, loss aversion
JEL Classification: C91, G02, G11
Suggested Citation: Suggested Citation