Cents and sensibility: Exploring non-proportional reasoning during stock market declines

This paper hypothesizes that some people do not use proportional reasoning, focusing on nominal rather than percentage change; this bias leads them to perceive higher-priced stocks as riskier and more likely to be sold off in a market downturn. A survey randomly assigned participants to one of four questionnaires, each with a stock price at a different order of magnitude ($2 to $2,000) and presented with a scenario of an unexplained stock crash, expressed in dollars. Participants assessed the stock’s riskiness and considered whether to sell it in response to the news. The results show that they perceived higher-priced stocks as riskier and sold more despite identical percentage decreases in all questionnaires. This cognitive bias was more pronounced among individuals who frequently follow stock-related news, young adults, and risk-taking individuals. These findings suggest that non-proportional reasoning could provide new insight into understanding investors’ behavior during a sudden spike in market volatility.