It Depends Who you Ask: Context Effects in the Perception of Stock Returns
39 Pages Posted: 4 Feb 2021 Last revised: 15 Mar 2021
Date Written: March 15, 2021
We use a large dataset of individual investor stock trades to demonstrate that investors are more likely to sell stocks with larger price changes in the previous day. This is consistent with investors trying to learn about the firms' fundamentals from stock returns. Our core contribution is to show that the same return elicits a much larger selling response when that return is extreme compared to the individual investor's own personal portfolio history of returns. The effect is large. When a return is extreme compared to an investor's personal history of returns, the coefficient on negative returns increases by a factor of 4.5 and the coefficient on positive returns increases by a factor of 2.0. Whereas stock returns are commonly considered to be "objective", here we have demonstrated considerable subjectivity in their perception.
Keywords: investor behavior, context effect, household finance
JEL Classification: G11, G02, D14
Suggested Citation: Suggested Citation