With a novel experimental design we investigate whether risk perception, return expectations, and investment propensity are influenced by the scale of the vertical axis in charts. We explore this for two presentation formats, namely return charts and price charts, where we depict low- and high-volatility assets with distinct trends. We find that varying the scale strongly affects people’s risk perception, as a narrower scale of the vertical axis leads to significantly higher perceived riskiness of an asset even if the underlying volatility is the same. Furthermore, past returns predict future return expectations almost perfectly. In our setting perceived profitability was considered more important than perceived riskiness when making investment choices. Overall we show that adapting the scale of a chart makes it easier to recognize yearly return variations within a single security, but at the same time makes it harder to identify differences between dissimilar securities. This is something regulators should be aware of and take into account in the rules they set.

/pdf/scale-matters-risk-perception-return-expectations-and-3wb4uic3za.pdf

Scale matters: risk perception, return expectations, and investment propensity under different scalings

We demonstrate that investor satisfaction and investment behavior are influenced substantially by the price path by which the final investor return is achieved. In a series of experiments, we analyze various different price paths. Investors are most satisfied if their assets first fall in value and then recover, and they are least satisfied with the opposite pattern, independent of whether the final return is positive or negative. Price paths systematically influence risk preferences, return beliefs, and ultimately trading decisions. Our results enable a much more holistic perspective on a wide range of topics in finance, such as the disposition effect, risk-taking behavior after previous gains and losses, and behavioral asset pricing.

/pdf/all-s-well-that-ends-well-on-the-importance-of-how-returns-30s7g3qi88.pdf

All’s well that ends well? On the importance of how returns are achieved

Prices and returns are alternative ways to present financial market information and to elicit financial market expectations. But do investors make sense of prices and returns in the same way? Also, do they state the same expectations when asked to forecast prices or to forecast returns? This paper compares the two formats in three studies with subjects of varying expertise, with various amount of information and with different incentive schemes. The results are consistent across all studies: Asking subjects to forecast returns as opposed to price levels results in higher expectations, whereas showing them return bar charts as opposed to price level line charts results in lower expectations. Our results imply that information platforms and financial advisors could affect investors' expectations by varying superficial features of the decision environment. Financial education is unlikely to be a useful remedy, since financial professionals are not immune to the impact of format changes.

Thinking About Prices versus Thinking About Returns in Financial Markets

Prices and returns are alternative ways to present information and to elicit expectations in financial markets. But do investors think of prices and returns in the same way? We present three studies with subjects having various levels of expertise, amount of information, and different incentive schemes. The results are consistent across all studies: Asking subjects to forecast returns as opposed to prices results in higher expectations, whereas showing them return charts as opposed to price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.

Thinking about Prices versus Thinking about Returns in Financial Markets

We demonstrate that investor satisfaction and investment behavior is influenced substantially by the price path by which the final investor return is achieved. In a series of experiments, we analyze various different price paths. Investors are most satisfied if their assets first fall in value and then recover, and they are least satisfied with the opposite pattern, independent of whether the final return is positive or negative. Price paths systematically influence risk preferences, return beliefs, and ultimately trading decisions. Our results enable a much more holistic perspective on a wide range of topics in finance, such as the disposition effect, risk-taking behavior after previous gains and losses, and behavioral asset pricing.

/pdf/all-s-well-that-ends-well-on-the-importance-of-how-returns-4bo2j025ka.pdf

All's Well that Ends Well? On the Importance of How Returns are Achieved

ABSTRACT How do counterterrorism policies in the United States reproduce anti-Black racism? Research on U.S. domestic counterterrorism post-9/11 has largely focused on the experiences of Muslim Americans while marginalising both overlapping and separate effects of counterterrorism policy on non-Muslim people of colour, particularly non-Muslim Black communities. I argue that domestic counterterrorism policy, as an act of determining what kinds of political contention the state finds non-threatening, has roots in the historical treatment of Black resistance and continues to derive power and legitimacy from oppressing Black communities. Using the case of the Black Liberation Army and its members, I show that federal counterterrorism institutions were shaped by opposition to Black liberation, alongside more well-studied threads of xenophobia and Islamophobia. This article thus extends understandings of discrimination and prejudice within the U.S. counterterrorism apparatus and advocates for greater attention to anti-Blackness not only in policing but in security institutions more broadly.

https://www.tandfonline.com/doi/pdf/10.1080/17539153.2022.2031132?needAccess=true

Terror as justice, justice as terror: counterterrorism and anti-Black racism in the United States

In this paper we analyze which graphical representation of risk is most effective in supporting investors to assess the risk and return characteristics of a fund. Moreover, we test on which criteria the investors base their risk taking behavior. To this end we compare return bar charts and price line charts, combined with some additional information such as a risk scale or a gain and loss range.We find that the risk communication with bar charts performs relatively well, except with regard to communicating the possibility of losses. Furthermore, we find that people generally underestimate risks and overestimate return. We additionally find that risk perception has the strongest influence on risk taking behavior, and in particular that a higher risk perception leads to less risk taking.

Anna Meier

Papers

Terror as justice, justice as terror: counterterrorism and anti-Black racism in the United States

Framing effects and risk perception: testing graphical representations of risk for the KIID

Racism by Designation: Making Sense of Western States’ Nondesignation of White Supremacists as Terrorists

Spreading hate: the global rise of white supremacist terrorism