Abstract
Investment decisions are very difficult because they involve money and can impact our quality of life. According to the axioms of rationality, different but equivalent information formats should not affect investment strategies. The authors perform two experiments here, and find evidence of a strong absolute magnitude effect on investment decisions. In Experiment 1, participants (students) chose to sell a losing fund more often when returns were expressed as a percentage of variation between the buying value and the actual value (e.g., 24%) than when they were expressed as a monetary difference between the buying price and the actual price (e.g., $0.24). In the context of the experiment, the percentage format decreased the disposition effect significantly. Furthermore, describing the stock returns as ratios (e.g., ¼) increased the tendency toward the status quo bias. In Experiment 2, the authors showed that the absolute magnitude of the numbers shaped participants' satisfaction with fund returns, and was responsible for the different choices of investment strategies.
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