Subjective Extremeness: Contrast Effects in the Perception of Stock Returns
67 Pages Posted: 4 Feb 2021 Last revised: 26 Jun 2023
Date Written: March 15, 2021
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: Suggested Citation