Thinking about Prices versus Thinking about Returns in Financial Markets

ABSTRACT 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 in which subjects differ in the level of expertise, amount of information, and type of incentive scheme. 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 rather than price charts results in lower expectations. Experience is not a useful remedy but cognitive reflection mitigates the impact of format changes.