Subjective Extremeness: Contrast Effects in the Perception of Stock Returns

Abstract

Stock returns convey information to investors about fundamental values. But, do all investors perceive the same stock return in the same way? Using a large dataset of retail investor trading decisions, we show that different investors respond differently to the same return, and that these differences are driven by the comparison of the return to investors' personal return experiences from the small set of stocks they own. The effect is economically large, robust to model specification, and stronger when investors are more likely to remember their return experiences. Overall, our findings suggest that contrast effects create considerable subjectivity in the perception of stock returns.

Keywords: contrast effects, salience, stock trading

JEL Classification: G11, G02, D14