Reconsidering Returns

Abstract

Investors' perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends, inducing mechanical underperformance on ex-dividend days. Newspapers are more pessimistic on these days, consistent with mistaking the index for a return. Market betas should track returns, but track prices more than dividends, creating predictable market returns. Mutual funds receive inflows for “beating the S&P 500,” comparing the price-only index with the fund's net asset value change (also not a return). Displaying returns by default would ameliorate these issues, which arise despite high attention and little ambiguity regarding the appropriate measure.

Keywords: Returns, Behavioral Finance, Asset Pricing, Indices, Mutual Funds, Information Display

JEL Classification: G02, G11, G12, G14, N32