Round Numbers and Security Returns

Johnson, Edward G.; Johnson, Nicole Bastian; Shanthikumar, Devin M.

doi:10.2139/ssrn.1108214

Cited by 9 publications

(6 citation statements)

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“…We show that the presence of a minimum tick size in the order book but not at the upstairs market implies the existence of price barriers in the upstairs market in a way similar to the existence of other asset price barriers (see Donaldson and Kim, 1993). The tendency of investors to perceive specific prices as support or resistance levels leads to price clustering above and below such prices, a finding which is very similar to the "reverse clustering" theory (see Bagnoli et al, 2006, Bhattacharya et al, 2012and Johnson et al, 2008. The latter refers to the tendency of investors to "anchor" their prices around final digits 0 and 5 (Bhattacharya et al, 2012), hence round numbers operate as barrier and resistance levels (Bagnoli et al, 2006).…”

Section: Introductionsupporting

confidence: 64%

The implications of a price anchoring effect at the upstairs market of the London Stock Exchange

Verousis

Gwilym

2014

International Review of Financial Analysis

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This paper studies the upstairs market of the Stock Exchange Trading System (SETS) of the London Stock Exchange (LSE). We hypothesise that the implicit interaction between the upstairs and the downstairs market at the LSE alters the pricing mechanism at the upstairs market. We show that in the upstairs market, market makers resort to "cluster undercutting" practices on the basis of a notional minimum price increment that resembles an anchoring-and-adjustment effect. In particular, we report that liquidity providers consistently buy just below the implicit minimum price increment and consistently sell just above it. This finding is strongly related to stock-price momentum and periods of increased trade intensity.Overall, this effect has only a weak connection to differences in informed trading and is mostly related to the notional price barriers and resistance levels introduced by the minimum tick size of the order book.

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Section: Introductionsupporting

confidence: 64%

The implications of a price anchoring effect at the upstairs market of the London Stock Exchange

Verousis

Gwilym

2014

International Review of Financial Analysis

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“…Second, once officers decide to give a break to some drivers, some prominent speed levels may well emerge as cognitive reference points. It is a general tendency of people to prefer round numbers like 10 and 15 (Johnson et al, 2007). Once using such round numbers as discount speeds is established as a social norm, officers may further try to avoid looking too meticulous by citing motorists at non-prominent speed levels such as 11 or 17.…”

Section: Massive Clustering Of Tickets At 10 Abovementioning

confidence: 99%

Detecting racial bias in speed discounting: Evidence from speeding tickets in Boston

Anbarcı

Lee

2014

International Review of Law and Economics

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“…Similarly Johnson et al (2007) showed that net profit when trading in nine-ending stock prices is significantly less than that associated with trading stocks just above a round number.…”

Section: Donaldson and Kim (1993) Looked At Price Barriers On The Dow Jones Industrialmentioning

confidence: 99%

Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect

Kansara

Sung

et al. 2020

The European Journal of Finance

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Investors' perceptions of price have been shown to be disproportionately affected by the leftmost digit(s). However, a similar left digit effect (LDE) in relation to another important determinant of investors' behaviour (i.e. trading profit) has not been explored. We examine over 7,314,570 million trades made by 25,766 individuals and find a LDE in profit that is 1.71 times stronger than that related to closing price; suggesting that individuals focus more on left digits in profit than price when deciding when to close a trade. In addition, we observe a positive synergistic relationship between the LDE related to profit and price, suggesting that its total influence may result in losses of billions of dollars per financial year for investors. We suggest that these results make a strong case for educating investors against this bias.

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Round Numbers and Security Returns

Cited by 9 publications

References 0 publications

The implications of a price anchoring effect at the upstairs market of the London Stock Exchange

The implications of a price anchoring effect at the upstairs market of the London Stock Exchange

Detecting racial bias in speed discounting: Evidence from speeding tickets in Boston

Towards a better understanding of the full impact of the left digit effect on individual trading behaviour: unearthing a trading profit effect

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