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Reconsidering Returns

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  • 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.

Suggested Citation

  • Samuel M. Hartzmark & David H. Solomon, 2020. "Reconsidering Returns," NBER Working Papers 27380, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27380
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    2. Kelly Shue & Richard R. Townsend, 2021. "Can the Market Multiply and Divide? Non‐Proportional Thinking in Financial Markets," Journal of Finance, American Finance Association, vol. 76(5), pages 2307-2357, October.

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    More about this item

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • N2 - Economic History - - Financial Markets and Institutions
    • N21 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: Pre-1913
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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