NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Samuel M. Hartzmark

Booth School of Business
University of Chicago
5807 South Woodlawn Avenue
Chicago, IL 60637

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NBER Working Papers and Publications

September 2017A Tough Act to Follow: Contrast Effects In Financial Markets
with Kelly Shue: w23883
A contrast effect occurs when the value of a previously-observed signal inversely biases perception of the next signal. We present the first evidence that contrast effects can distort prices in sophisticated and liquid markets. Investors mistakenly perceive earnings news today as more impressive if yesterday’s earnings surprise was bad and less impressive if yesterday’s surprise was good. A unique advantage of our financial setting is that we can identify contrast effects as an error in perceptions rather than expectations. Finally, we show that our results cannot be explained by a key alternative explanation involving information transmission from previous earnings announcements.
 
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