Scale matters: risk perception, return expectations, and investment propensity under different scalings

Area of Science:

• Behavioral Finance
• Financial Charting
• Decision Science

Background:

• Financial charts are crucial for investment decisions.
• The visual presentation of data can influence perception.
• Understanding how chart design impacts investor behavior is vital.

Purpose of the Study:

• To investigate the impact of vertical axis scale manipulation in financial charts.
• To determine how chart scale affects risk perception, return expectations, and investment propensity.
• To analyze these effects across different chart types (return and price) and asset volatilities.

Main Methods:

• Novel experimental design using controlled chart presentations.
• Manipulation of vertical axis scales in return and price charts.
• Inclusion of low- and high-volatility assets with distinct trends.

Main Results:

• Varying chart scale significantly alters perceived risk; narrower scales inflate perceived riskiness.
• Past returns demonstrated a near-perfect predictive relationship with future return expectations.
• Perceived profitability was prioritized over perceived riskiness in investment decisions.

Conclusions:

• Chart scale adaptation enhances within-security return variation recognition but hinders between-security comparison.
• Visual data representation in financial charting can be misleading.
• Regulators should consider the impact of chart design on investor perception and decision-making.