Nominal Price (Dis)illusion: Fractional Shares on Neobroker Trading Platforms

Abstract

We investigate the channels through which nominal prices affect the behavior of neobrokerage traders. We hypothesize that innovations such as free commissions and notification alerts reinforce these effects compared with those documented for regular exchanges. Indeed, by exploiting quasi-natural experiments on stock splits on Robinhood, we find evidence of a stronger response. Surprisingly, one innovation changed everything: the introduction of fractional shares. This eliminates the previously amplified effects, except in the short term. Our findings do not support nominal price illusion, a behavioral explanation for the higher preference for lower nominal prices. Instead, they primarily support the affordability constraint hypothesis. These results indicate a dissolving optimal price range.

Keywords: Nominal Price Illusion, Fractional Shares, Stock Splits, Neobroker JEL Classification: G11, G14, G21, G41

JEL Classification: G02,G11,G14,G21,G23