Subjective Extremeness: Contrast Effects in the Perception of Stock Returns

Stock returns convey information to investors about fundamental values. But do all
investors perceive a specific stock return homogenously?

Using a large dataset of retail investor trading decisions, we show that different investors respond differently to the same return, and that these differences reflect the comparison of the specific return to investors’ personal return experiences from the few stocks they own. The effect is stronger when investors’ return experiences are likely to be remembered more vividly, and extends to mutual fund managers and corporate executives. Overall, our findings suggest that contrast effects create subjectivity in the perception of stock returns.

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