Review of Finance Advance Access first published online on April 9, 2007
This version published online on April 23, 2007
Review of Finance, doi:10.1093/rof/rfm008
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Framing Effects in Stock Market Forecasts: The Difference Between Asking for Prices and Asking for Returns*
1 Universität Mannheim
2 Universität Münster
3 Siemens Management Consulting
4 Universität Mannheim and CEPR
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.
JEL Classification: C9, G1
* We would like to thank the editor, Peter Bossaerts, two anonymous referees, Patric Andersson, Hendrik Bessembinder, Joep Sonnemans, Monika Undorf, David Yermack, Ning Zhu, and seminar participants at the University of Mannheim, the SIFR (Swedish Institute of Financial Research) and SITE (Stockholm Institute of Transition Economics) governance seminar in Stockholm, the Behavioral Decision Research in Management (BDRM) 2006 Conference, UCLA, the 13th Annual Meeting of the German Finance Association (DGF), Oestrich-Winkel, and the American Finance Association 2007 Meetings in Chicago for valuable comments and insights. Large parts of the paper were written while Markus Glaser was visiting the Swedish Institute for Financial Research (SIFR), Stockholm, whose support is gratefully acknowledged. Financial Support from the Deutsche Forschungsgemeinschaft (DFG) is also gratefully acknowledged.