Preferences for maximum daily returns: Evidence from a discrete choice experiment

Abstract

It is commonly assumed that individual investors are attracted to stocks with high maximum daily returns (MAX) because they overweight low probabilities for large gains. This paper presents results from a discrete choice experiment that does not support a general preference for high-MAX stocks. When choosing between two stocks based on historical real-world returns, subjects systematically prefer low-MAX stocks although alternatives are matched in terms of risk-return-characteristics and return ordering. These experimental findings call for alternative explanations for the MAX effect beyond individuals' lottery preferences.

Keywords: MAX effect, choice experiment

JEL Classification: C91, D91, G40