Financial chart's y-axis and how we perceive risk and how we make investment decisions

What is it about?

We show that the y-axis of financial charts influences how we perceive risk and how we make investment decisions: with a "narrow" scale - that is, large bars or little space between the upper or lower end of the chart - we perceive the historical returns/prices as more risky compared to a "wide" scale. Consequently, people's investment decisions partly depend on the perceived riskiness of an asset.

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Why is it important?

Most investment decisions are preceded by looking at charts showing the historical returns and/or prices of the relevant asset. Regulators, financial information providers, customers and consumers should be aware of—and attentive to—the potentially distorting effects of different axis scales in these financial charts.