The role of extrema-locations in price paths: application to reference prices

Abstract

Price paths are often used to visually represent information about financial products. The path that follows the initial price systematically influences individuals’ self-reported reference prices. Due to the recency bias, individuals often overweight information in the latter part of the path. I therefore study the effect of extrema-locations within up-down and down-up paths in an online controlled experiment. I conclude that individuals are unaffected by the location of the maximum, but report lower reference prices for down-up paths with a late minimum relative to down-up paths with an early minimum.