Samuel M. Hartzmark and
David H. Solomon
No 27380, NBER Working Papers from National Bureau of Economic Research, Inc
Investors' perception of performance is biased because the relevant measure, returns, is rarely displayed. Major indices ignore dividends thereby underreporting market performance. Newspapers are more pessimistic on ex-dividend days, consistent with mistaking the index for returns. Market betas should track returns, but track prices more than dividends, creating predictable returns. Mutual funds receive inflows for “beating the S&P 500,” price index based on net asset value (also not a return). Investors extrapolate market indices, not returns, when forming annual performance expectations. Displaying returns by default would ameliorate these issues, which arise despite high attention and agreement on the appropriate measure.
JEL-codes: G02 G11 G12 G14 N2 N21 N22 (search for similar items in EconPapers)
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