Subjective Extremeness: Contrast Effects in the Perception of Stock Returns

67 Pages Posted: 4 Feb 2021 Last revised: 26 Jun 2023

See all articles by Constantinos Antoniou

Constantinos Antoniou

University of Warwick - Warwick Business School

Junyang Guo

University of Warwick - Warwick Business School

Neil Stewart

University of Warwick - Warwick Business School

Date Written: March 15, 2021

Abstract

Stock returns convey information to investors about fundamental values. But do all investors perceive a specific stock return homogenously? Using a large dataset of retail investor trading decisions, we show that investors respond differently to the same return. These different responses are caused by the investor's comparison of the specific return with their personal return experiences from the few stocks they own. The effect is stronger when investors' return experiences are likely to be remembered more vividly, and extends to mutual fund managers and corporate executives. Overall, our findings suggest that contrast effects create considerable subjectivity in the perception of stock returns and considerable variability in subsequent actions.

Keywords: contrast effects, return salience, stock trading

JEL Classification: G11, G02, D14

Suggested Citation

Antoniou, Constantinos and Guo, Junyang and Stewart, Neil, Subjective Extremeness: Contrast Effects in the Perception of Stock Returns (March 15, 2021). Available at SSRN: https://ssrn.com/abstract=3777778 or http://dx.doi.org/10.2139/ssrn.3777778

Constantinos Antoniou

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Junyang Guo (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Neil Stewart

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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