Working Paper: NBER ID: w27380
Authors: Samuel M. Hartzmark; David H. Solomon
Abstract: 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.
Keywords: performance; investor behavior; market indices; total returns; dividends
JEL Codes: G02; G11; G12; G14; N2; N21; N22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| display of performance information (Y10) | investor perceptions (G24) |
| display of performance information (Y10) | market behavior (D40) |
| price indices (C43) | systematic underestimation of market performance (G41) |
| systematic underestimation of market performance (G41) | negative bias in investor expectations (G41) |
| negative bias in investor expectations (G41) | predictable misallocations of capital (G31) |
| dividend payouts (G35) | negative coverage by journalists (Y30) |
| negative coverage by journalists (Y30) | skewed public perception of market performance (G41) |
| mutual fund flows (G23) | directed towards funds outperforming S&P 500 price index (G23) |
| stocks' betas (C46) | more closely aligned with price changes (E30) |
| stocks' betas (C46) | less aligned with dividend yields (G19) |