Investors have a biased perception of performance because they rarely observe returns, the central measure of performance in academic finance. Major market indices are price indices without dividend reinvestment, as they pre-date the academic consensus in favor of returns from the mid 20th century. This leads to predictable drops when constituent stocks go ex-dividend, which markets fail to price. Market betas should track returns, but portfolios track price changes more than dividends, creating predictable market returns. Financial newspaper articles are more negative on index ex-days. Investors discontinuously reward mutual funds with inflows for "beating the S&P 500," by comparing the price-only index with the fund's change in net asset value (another non-return measure).
Finance Seminars at Caltech are funded through the generous support of The Ronald and Maxine Linde Institute of Economic and Management Sciences (lindeinstitute.caltech.edu) and Stephen A. Ross.