2018 Hillcrest Behavioral Finance Award

Reconsidering Returns

Samuel Hartzmark (University of Chicago)

David Solomon (Boston College)

Investors have a biased perception of performance because the relevant measure, returns, is rarely displayed in brokerage statements, finance websites, newspapers or market indices. Major indices are price indices and ignore dividends, leading to predictable declines on ex-dividend days. Market betas should track returns, but actually track price changes more than dividends, creating predictable market returns. Financial newspaper articles are more negative on index ex-days when the indices mechanically understate performance. Investors reward mutual funds with inflows for “beating the S&P 500,” by comparing the price-only index with the fund’s net asset value change (another non-return measure). The sub-optimal design of these indices is likely related to hysteresis from their pre-dating the academic consensus in favor of returns which began in the mid-20th century. We demonstrate the wrong choice of default display can influence prices and capital allocation in financial markets in a setting with high attention and little ambiguity as to the appropriate measure. We suggest a policy shifting information display to returns to ameliorate these issues.

This paper is located on SSRN.

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