Does the left-digit bias affect prices in financial markets?

Florian Heraud and Lionel Page

Journal of Economic Behavior & Organization, 2024, vol. 218, issue C, 20-29

Abstract: According to the left-digit bias, people pay more attention to the leftmost digits of a number and tend to disregard the last digits of that number. We investigate whether this bias affects traders' perception and pricing in a large financial market trading foreign exchange options. Our theoretical model predicts that the left-digit bias affects prices, causing a discontinuous jump in expected returns when comparing markets at threshold prices 10,20,…,90 with markets at prices just below these thresholds, such as 9.9,19.99, etc. The model predicts no discontinuity in returns among unbiased traders. Using a regression discontinuity approach over the returns of more than 1 million options, we find significant discontinuities in the expected returns, consistent with mispricing induced by the left-digit bias.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:218:y:2024:i:c:p:20-29

DOI: 10.1016/j.jebo.2023.10.012

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