Abstract
Empirical evidence shows that stock price magnitude influences portfolio choices and/or future returns, an observation at odds with standard finance theory. Authors most often refer to stock characteristics like a high variance and a positive skewness of returns to justify this result. In this paper, we use an experimental setting to demonstrate that price magnitude impacts investors behavior and market mispricing, independently of the distribution of future returns. Our results show that lottery-like features or perceived skewness are not enough to explain the role of price magnitude. We interpret this anomaly in the light of the neuropsychological theory of the perception of numbers by the human brain. Our experimental market design allows us to show that subjects process "small"and "large"prices differently, everything else being equal, in particular the objective distribution of future returns. Two consecutive treatments are performed, one with a fundamental value equal to 6 (small price market) and one with a fundamental value equal to 72 (large price market). The small price market exhibits greater mispricing than the large price market. Our findings cannot be explained by stock characteristics (lottery-like features or perceived skewness); the price magnitude in itself has a direct impact on how the subjects' brain perceive the distribution of future returns. Though at odds with standard finance theory, our findings are consistent with: (1) evidence in neuropsychology on the use of different mental scales for small and large numbers, and (2) empirical results in the finance literature.