Price magnitude, trading behavior and mispricing: An experiment

Tristan Roger (), Patrick Roger (), Wael Bousselmi () and Marc Willinger
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Tristan Roger: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine, ICN Business School
Patrick Roger: UNC - Université de la Nouvelle-Calédonie, LARJE - Laboratoire de Recherches Juridique et Economique - UNC - Université de la Nouvelle-Calédonie, EM Strasbourg - École de Management de Strasbourg = EM Strasbourg Business School, LARGE - Laboratoire de Recherche en Gestion et Economie - UNISTRA - Université de Strasbourg
Wael Bousselmi: ESSCA - ESSCA – École supérieure des sciences commerciales d'Angers = ESSCA Business School
Marc Willinger: CEE-M - Centre d'Economie de l'Environnement - Montpellier - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - Institut Agro Montpellier - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement - UM - Université de Montpellier

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Abstract: Empirical evidence shows that stock price magnitude influences portfolio choices and/or future returns, an observation at odds with standard finance theory. Authors most often refer to stock characteristics such as high variance and positive skewness of returns to justify this result. In this paper, we show that price magnitude matters independently of stock characteristics. Using experimental markets, which allow us to neutralize the effect of asset characteristics, we find that subjects process "small"and "large"prices differently. Small price markets exhibit greater mispricing than large price markets. Our findings cannot be explained by stock characteristics (lottery-like features or perceived skewness), which indicates that the price magnitude in itself has a direct impact on how the subjects' brain perceives the distribution of future returns. Though at odds with standard finance theory, our findings are consistent with: (1) evidence in neuropsychology on the use of different mental scales for small and large numbers, and (2) empirical results in the finance literature.

Keywords: Experimental markets; number perception; behavioral bias; stock price magnitude; mental scales (search for similar items in EconPapers)
Date: 2024-11-25
Note: View the original document on HAL open archive server: https://hal.science/hal-04772822v1
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Published in Journal of Behavioral Finance, 2024, ⟨10.1080/15427560.2024.2427008⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04772822

DOI: 10.1080/15427560.2024.2427008

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