Explaining the price-volume relationship: The difference between price changes and changing prices

Abstract

Trading on the stock market increases when there are large changes in price levels, and falls when these changes are small. An experimental test revealed strong support for the hypothesis that large price changes cause heavy trading. Trading patterns, profit data, and memory measures revealed that the vast majority of the subjects employed a tracking strategy; that is, they bought when the price fell and sold when it rose. To test whether the use of this strategy was due to a selective application of the representativeness heuristic on the price stimuli, a second experiment was conducted in which subjects were presented either with only price information or with only price change information. Results supported the representativeness hypothesis, with subjects in the price change condition tracking poorly and earning less profit. The results are discussed with regard to their implications for the stock market and the psychology of prediction.