Behavioral biases exist and they really do matter for both the individual investor and markets overall. A provocative paper attacks one of the more obvious problem in finance that should have been explored much earlier. The paper, "Can the Market Multiply and Divide? Non-proportional Thinking in Financial Markets" studies the problem that investors don't seem to understand the difference between a $10 price change and 10% or proportional change.
We may be so used to hearing financial data presented in a certain way that we don't even notice the problem. A commentator will say stock x is up $5, or the benchmark index is up Y points without saying the percentage change is contributing to the bias.
This problem becomes obvious when you scale values by price, a $x change in a stock that has a low price will have a very different meaning from a $x change in a higher priced stock. Proportionality matters. Ineffective juggling between dollar price and percentage changes is a problem for the individual, but when explored at the market level it can explain some of the odd anomalies or puzzles seen in the stock market.
Investors usually think about dollar not percentage units which leads to more extreme responses to news for lower priced stocks. Higher price stocks will be less volatile - a doubling in price will lead to an approximate 25% decline in volatility. Consequently, volatility jumps after a stock split. Lower price stocks will respond more strongly to firm-specific news. This non-proportional thinking can explain size-volatility/beta relationships, the leverage effect and return drift.
Guard your thinking through always thinking about the proportional impact of prices.
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