[go: up one dir, main page]
More Web Proxy on the site http://driver.im/
IDEAS home Printed from https://ideas.repec.org/a/eee/jobhdp/v131y2015icp67-80.html
   My bibliography  Save this article

The prospect of a perfect ending: Loss aversion and the round-number bias

Author

Listed:
  • Fraser-Mackenzie, P.
  • Sung, M.
  • Johnson, J.E.V.
Abstract
Studies across a range of domains have shown that individuals tend to focus on round numbers as cognitive reference points; a so-called left-digit effect. We explain this effect by combining analog numerical heuristics with prospect theory in order to develop an analog value function that predicts the key characteristics of the left-digit effect. Most importantly, this value function predicts an unreported phenomenon, namely; that the left-digit effect will be more pronounced in situations involving losses (cf. gains). We confirm this prediction in both a laboratory experiment regarding hypothetical investments and analysis of buy–sell imbalances in over 15million trades by investors in a financial market. We conclude that our analog value function is a promising explanation for the left-digit effect. Furthermore, we suggest that interventions aimed at reducing costly buy–sell imbalances in financial markets should focus on the decisions made by investors when they are facing loss.

Suggested Citation

  • Fraser-Mackenzie, P. & Sung, M. & Johnson, J.E.V., 2015. "The prospect of a perfect ending: Loss aversion and the round-number bias," Organizational Behavior and Human Decision Processes, Elsevier, vol. 131(C), pages 67-80.
  • Handle: RePEc:eee:jobhdp:v:131:y:2015:i:c:p:67-80
    DOI: 10.1016/j.obhdp.2015.08.004
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0749597815000953
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.obhdp.2015.08.004?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Mark Stiving, 2000. "Price-Endings When Prices Signal Quality," Management Science, INFORMS, vol. 46(12), pages 1617-1629, December.
    2. Victor Niederhoffer, 1965. "A New Look at Clustering of Stock Prices," The Journal of Business, University of Chicago Press, vol. 39, pages 309-309.
    3. Nicola Lacetera & Devin G. Pope & Justin R. Sydnor, 2012. "Heuristic Thinking and Limited Attention in the Car Market," American Economic Review, American Economic Association, vol. 102(5), pages 2206-2236, August.
    4. Stiving, Mark & Winer, Russell S, 1997. "An Empirical Analysis of Price Endings with Scanner Data," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 24(1), pages 57-67, June.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    7. Summers, Barbara & Duxbury, Darren, 2012. "Decision-dependent emotions and behavioral anomalies," Organizational Behavior and Human Decision Processes, Elsevier, vol. 118(2), pages 226-238.
    8. Meghan R. Busse & Nicola Lacetera & Devin G. Pope & Jorge Silva-Risso & Justin R. Sydnor, 2013. "Estimating the Effect of Salience in Wholesale and Retail Car Markets," American Economic Review, American Economic Association, vol. 103(3), pages 575-579, May.
    9. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    10. Peter Fraser-Mackenzie & Itiel Dror, 2011. "Dynamic reasoning and time pressure: Transition from analytical operations to experiential responses," Theory and Decision, Springer, vol. 71(2), pages 211-225, August.
    11. Chaoshin Chiao & Zi‐May Wang, 2009. "Price Clustering: Evidence Using Comprehensive Limit‐Order Data," The Financial Review, Eastern Finance Association, vol. 44(1), pages 1-29, February.
    12. Harris, Lawrence, 1991. "Stock Price Clustering and Discreteness," The Review of Financial Studies, Society for Financial Studies, vol. 4(3), pages 389-415.
    13. David L. Ikenberry & James P. Weston, 2008. "Clustering in US Stock Prices after Decimalisation," European Financial Management, European Financial Management Association, vol. 14(1), pages 30-54, January.
    14. Utpal Bhattacharya & Craig W. Holden & Stacey Jacobsen, 2012. "Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers," Management Science, INFORMS, vol. 58(2), pages 413-431, February.
    15. Kenneth C. Manning & David E. Sprott, 2009. "Price Endings, Left-Digit Effects, and Choice," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 36(2), pages 328-335.
    16. Basu, Kaushik, 1997. "Why are so many goods priced to end in nine? And why this practice hurts the producers," Economics Letters, Elsevier, vol. 54(1), pages 41-44, January.
    17. Ravi Dhar & Ning Zhu, 2006. "Up Close and Personal: Investor Sophistication and the Disposition Effect," Management Science, INFORMS, vol. 52(5), pages 726-740, May.
    18. Victor Niederhoffer, 1965. "Clustering of Stock Prices," Operations Research, INFORMS, vol. 13(2), pages 258-265, April.
    19. Manoj Thomas & Vicki Morwitz, 2005. "Penny Wise and Pound Foolish: The Left-Digit Effect in Price Cognition," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 32(1), pages 54-64, June.
    20. Ahn, Hee-Joon & Cai, Jun & Cheung, Yan Leung, 2005. "Price clustering on the limit-order book: Evidence from the Stock Exchange of Hong Kong," Journal of Financial Markets, Elsevier, vol. 8(4), pages 421-451, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Tao, 2018. "Round-number biases and informed trading in global markets," Journal of Business Research, Elsevier, vol. 92(C), pages 105-117.
    2. John List, 2021. "How Field Experiments in Economics Can Complement Psychological Research on Judgment Biases," Natural Field Experiments 00738, The Field Experiments Website.
    3. Matteo Migheli, 2017. "The winner’s curse in auctions with losses," Mind & Society: Cognitive Studies in Economics and Social Sciences, Springer;Fondazione Rosselli, vol. 16(1), pages 113-126, November.
    4. Kimbrough, Erik O. & Porter, David & Schneider, Mark, 2021. "Reference dependent prices in bargaining: An experimental examination of precise first offers," Journal of Economic Psychology, Elsevier, vol. 86(C).
    5. Ozcan, Timucin & Hair, Michael & Gunasti, Kunter, 2024. "How reaching numerical roundness on subgoals affects the completion of superordinate goals," Journal of Business Research, Elsevier, vol. 177(C).
    6. Ross, Stephen L. & Zhou, Tingyu, 2024. "Loss aversion and focal point bias: Empirical evidence from housing markets," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    7. Stephen L. Ross & Tingyu Zhou, 2020. "Documenting Loss Aversion Using Evidence of Round Number Bias," Working Papers 2020-079, Human Capital and Economic Opportunity Working Group.
    8. Haim Levy & Moshe Levy, 2021. "Prospect theory, constant relative risk aversion, and the investment horizon," PLOS ONE, Public Library of Science, vol. 16(4), pages 1-21, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brown, Alasdair & Yang, Fuyu, 2016. "Limited cognition and clustered asset prices: Evidence from betting markets," Journal of Financial Markets, Elsevier, vol. 29(C), pages 27-46.
    2. Chen, Tao, 2018. "Round-number biases and informed trading in global markets," Journal of Business Research, Elsevier, vol. 92(C), pages 105-117.
    3. Snir, Avichai & Levy, Daniel, 2021. "If You Think 9-Ending Prices Are Low, Think Again," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 6(1 (Forthc).
    4. Meng, Charlotte C., 2023. "The price paid: Heuristic thinking and biased reference points in the housing market," Journal of Urban Economics, Elsevier, vol. 134(C).
    5. Han, SeungOh, 2024. "Price clustering on cryptocurrency order books at a US-based exchange," Journal of Behavioral and Experimental Finance, Elsevier, vol. 41(C).
    6. Vladim'ir Hol'y & Petra Tomanov'a, 2021. "Modeling Price Clustering in High-Frequency Prices," Papers 2102.12112, arXiv.org, revised Mar 2021.
    7. Das, Sougata & Kadapakkam, Palani-Rajan, 2020. "Machine over Mind? Stock price clustering in the era of algorithmic trading," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    8. Donglian Ma & Hisashi Tanizaki, 2022. "Intraday patterns of price clustering in Bitcoin," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-25, December.
    9. Jeong, Ji Youn & Crompton, John L., 2018. "Do subjects from high and low context cultures attribute different meanings to tourism services with 9-ending prices?," Tourism Management, Elsevier, vol. 64(C), pages 110-118.
    10. Mishra, Ajay Kumar & Tripathy, Trilochan, 2018. "Price and trade size clustering: Evidence from the national stock exchange of India," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 63-72.
    11. Lallouache, Mehdi & Abergel, Frédéric, 2014. "Tick size reduction and price clustering in a FX order book," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 416(C), pages 488-498.
    12. Snir, Avichai & (Allan) Chen, Haipeng & Levy, Daniel, 2022. "Zero-ending prices, cognitive convenience, and price rigidity," Journal of Economic Behavior & Organization, Elsevier, vol. 203(C), pages 519-542.
    13. Levy, Daniel & Snir, Avichai & Gotler, Alex & Chen, Haipeng (Allan), 2020. "Not all price endings are created equal: Price points and asymmetric price rigidity," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, issue forthcomi.
    14. Cardella, Eric & Seiler, Michael J., 2016. "The effect of listing price strategy on real estate negotiations: An experimental study," Journal of Economic Psychology, Elsevier, vol. 52(C), pages 71-90.
    15. Asmus Olsen, 2013. "The politics of digits: evidence of odd taxation," Public Choice, Springer, vol. 154(1), pages 59-73, January.
    16. Jan Wieseke & Anika Kolberg & Laura Marie Schons, 2016. "Life could be so easy: the convenience effect of round price endings," Journal of the Academy of Marketing Science, Springer, vol. 44(4), pages 474-494, July.
    17. Baig , Ahmed & Blau , Ben & Hao, Jie, 2020. "Accounting Information Quality and the Clustering of Stock Prices," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 182-210, November.
    18. Jinyoung Yu & Young‐Chul Kim & Doojin Ryu, 2024. "Left‐digit biases: Individual and institutional investors," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 44(3), pages 518-532, March.
    19. Utpal Bhattacharya & Craig W. Holden & Stacey Jacobsen, 2012. "Penny Wise, Dollar Foolish: Buy-Sell Imbalances On and Around Round Numbers," Management Science, INFORMS, vol. 58(2), pages 413-431, February.
    20. Lin, Tse-Chun & Pursiainen, Vesa, 2021. "The round number heuristic and entrepreneur crowdfunding performance," Journal of Corporate Finance, Elsevier, vol. 68(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jobhdp:v:131:y:2015:i:c:p:67-80. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/obhdp .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.