Framing Effects in Stock Market Forecasts: The Difference between Asking for Prices and Asking for Returns

Review of Finance, Vol. 11, pp. 325-357, 2007

Posted: 13 Jun 2007

See all articles by Markus Glaser

Markus Glaser

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

Martin Weber

University of Mannheim - Department of Banking and Finance

Thomas Langer

University of Muenster - Finance Center

Jens Reynders

Siemens Management Consulting

Multiple version iconThere are 2 versions of this paper

Abstract

Studies analyzing return expectations of financial market participants like fund managers, CFOs or individual investors are highly influential in academia and practice. We argue and show that the results in these surveys above are easily influenced by the elicitation mode of return expectations. Surveys that ask for future stock price levels are more likely to produce mean reverting expectations than surveys that directly ask for future returns. Furthermore, we conduct a questionnaire study that explicitly analyzes whether the specific elicitation mode affects return expectations in the above direction. In our study, subjects were asked to state mean forecasts for seven time series. Using a between subject design, one half of the subjects was asked to state future price levels, the other group was directly asked for returns. We observe a highly significant framing effect. For upward sloping time series, the return forecasts stated by investors in the return forecast mode are significantly higher than those derived for investors in the price forecast mode. For downward sloping time series, the return forecasts given by investors in the return forecast mode are significantly lower than those derived for investors in the price forecast mode. We argue that this finding is consistent with behavioral theories of investor expectation formation based on the representativeness heuristic.

Keywords: Return forecast, volatility forecast, confidence interval, individual investor, overconfidence, expertise, financial education, financial literacy, framing effect, investor surveys

JEL Classification: C9, G1

Suggested Citation

Glaser, Markus and Weber, Martin and Langer, Thomas and Reynders, Jens, Framing Effects in Stock Market Forecasts: The Difference between Asking for Prices and Asking for Returns. Review of Finance, Vol. 11, pp. 325-357, 2007, Available at SSRN: https://ssrn.com/abstract=993416

Markus Glaser (Contact Author)

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Schackstra├če 4
Munich, 80539
Germany

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

Thomas Langer

University of Muenster - Finance Center ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany
+49 251 83 22033 (Phone)

Jens Reynders

Siemens Management Consulting ( email )

St.-Martin-Str. 76
D-81541 Munich
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
868
PlumX Metrics