Number Processing and Price Dynamics: A Market Experiment

45 Pages Posted: 27 Mar 2020

See all articles by Tristan Roger

Tristan Roger

Université Paris-Dauphine, PSL Research University

Wael Bousselmi

Université Montpellier I

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School

Marc Willinger

University of Montpellier

Date Written: January 31, 2020

Abstract

Conventional finance models assume that stock price magnitude should not influence portfolio choices or future returns. This view is contradicted, however, by empirical evidence. In this paper, we show that trading prices, in experimental markets, are processed differently by participants depending on their magnitude. Our experiment has two consecutive treatments. One where the fundamental value is a small number (small price market) and one where the fundamental value is a large number (large price market). Small price markets exhibit greater mispricing than large price markets. We obtain this result both between-participants and within-participants. Our findings indicate that price magnitude has a direct impact on how individuals perceive the distribution of future returns. This result is at odds with standard finance theory but is consistent with: (1) evidence in neuropsychology on the use of different mental scales for small and large numbers, and (2) empirical results in the finance and accounting literature.

Keywords: experimental markets, number perception, behavioral bias, stock price magnitude, mental scales

Suggested Citation

Roger, Tristan and Bousselmi, Wael and Roger, Patrick and Willinger, Marc, Number Processing and Price Dynamics: A Market Experiment (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3548122 or http://dx.doi.org/10.2139/ssrn.3548122

Tristan Roger (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Wael Bousselmi

Université Montpellier I ( email )

Avenue de la Mer Site Richter
163 Rue Auguste Broussonnet
Montpellier, Cedex 2 34090
France

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School ( email )

PEGE
61 avenue de la Forêt Noire
Strasbourg, 67000
France

Marc Willinger

University of Montpellier ( email )

163 rue Auguste Broussonnet
France

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