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Does Past Success Lead Analysts to Become Overconfident?

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Abstract

This paper provides evidence that analysts who have predicted earnings more accurately than the median analyst in the previous four quarters tend to be simultaneously less accurate and further from the consensus forecast in their subsequent earnings prediction. This phenomenon is economically and statistically meaningful. The results are robust to different estimation techniques and different control variables. Our findings are consistent with an attribution bias that leads analysts who have experienced a short-lived success to become overconfident in their ability to forecast future earnings.

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... Behavioral researchers realized that experts tend to be overconfident and pay insufficient regard to distributional information (Almandoz and Tilcsik, 2016;Harvey, 1997;Tichy, 2004). Overconfidence can result from a perception that the occurrence of an event could be controlled (Wright and Ayton, 1992) or from an overvaluation of past forecasting success (Hilary and Menzly, 2006). Overconfidence can also lead experts to ignore or discount valuable information that is in conflict with their own initial S. Mauksch, et al. ...
... While many scholars underline the "theoretical value" of self-assessment, empirical studies frequently show that self-declared experts fail to perform (for a review, see Ward et al., 2002). The studies of Tichy (2004) and Green and Armstrong (2007a), for instance, indicate that experts with higher self-ratings succumb to stronger overoptimism and overconfidence biases in their long-term forecasts (see also Hilary and Menzly, 2006;Kahneman and Klein, 2009). Rowe et al. (1991) conclude that self-ratings may not help to identify true experts, but only those who "believe themselves to be experts" (p. ...
... Similarly, Denrell and Fang (2010), found that accurate forecasts of extreme events or short periods of success could be a signal of poor rather than good judgment. There is also a considerable potential that past success leads to overconfidence in experts (Hilary and Menzly, 2006), so that the accuracy of their judgments may decrease rather than increase in the long run. Most importantly, however, past performance is meaningful only in the context of Poli's (2011) type 1 of forecasting tasks, which extrapolate from the past into the future and which are based on "judgment" rather than "vision." ...
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While decision research tends to treat the question of expertise with suspicion, the capacity of experts within the wider, applied field of foresight often remains unquestioned. In this review of expert identification methods, we share the positive assessment of expert judgment for exploring plausible conditions of the future. However, given the contested status of expertise, it is crucial to know how a particular mode of recruitment, or (more often) a combination of diverse methods, seeks to secure the expert status of a person. Our review is motivated by the conviction that foresight researchers should not only assume value in expertise, but defend this value from scientific viewpoints. Based on an introduction to sociological, behavioral and cognitive perspectives on expertise, we trace the epistemological premises guiding different modes of selection. We list eight expert identification methods and explore their core assumptions, strengths, weaknesses and domain examples. Developing such linkages between priorities in expert selection and the arguments underlying them is the major contribution of this article. A second contribution lies in providing an overview of expert selection methods, ranging from simple and low-cost to more complex and combined methodologies.
... Two main reasons justify the inclination of overconfident CEOs to engage in corporate environmental misconduct. First, overconfident CEOs tend to rely too much on their own decisions and overrate the success rate of their company [60]. Overconfident CEOs, who are prone to being overly optimistic and lacking caution, may underestimate the risks caused by their violations of environmental regulations and believe that the impact of adverse events is limited [61]. ...
... Tang, Qian [31] observed that there is a greater likelihood participate in activities responsible for society among CEOs who rely on stakeholders to obtain greater resource. However, overconfident CEOs are prone to overestimate their capability to control internal management and adapt to understand external context [60]. Even without external assistance, such CEOs believe they have sufficient ability to cope with management risks [31]. ...
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Enterprises are drawing growing criticism for violating environmental rules. The research examines whether and how top executives’ mental bias leads to corporate environmental misconduct (CEI). Drawing on upper echelon theory (UET) and agency theory, we link CEO overconfidence with CEI, and explore the boundary conditions from the perspective of management discretion at the governance level. Using a data set covering the Chinese listed enterprises from 2004 to 2016, the empirical results demonstrate that CEO overconfidence positively and markedly influenced CEI. Moreover, shareholder concentration and CEO duality reinforce the relationship between overconfidence and CEI, whereas board independence is the opposite. The findings clarify ecological outcomes of CEO overconfidence and have remarkable significance in theory and practice.
... Lastly, we add to the literature on analysts' cognitive biases. Prior literature shows that analysts tend to overreact to positive information and underreact to negative information (Easterwood and Nutt 1999), that uncertainty amplifies analysts' overreaction (De Bondt and Thaler 1990), and that analysts become overconfident due to past success (Hilary and Menzly 2006). Our study reveals a novel form of analysts' cognitive bias -overprecision. ...
... An emerging literature incorporates psychology research into financial decision-making by investors and intermediaries (Hilary and Menzly 2006;Hribar and McInnis 2012;Hirshleifer et al. 2018). Similarly, we explore individuals' overprecision in the context of sell-side analyst forecasts. ...
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We examine the properties of overprecise forecasts, i.e., forecasts with more digits after the decimal than the mode of forecasts issued by all analysts following a given firm in a given year. Contrary to conventional wisdom, we find that overprecise forecasts are less accurate than peer forecasts. The lower accuracy is related to inexperienced analysts, who tend to overweight their models and produce more specific, yet less accurate forecasts. Additional analyses indicate that analysts issue fewer overprecise forecasts as they gain experience and that experience mitigates the negative association between forecast overprecision and forecast accuracy. Forecast overprecision is also positively associated with forecast boldness and brokerage house prestige, two proxies for analyst overconfidence in their model outputs. We further document that the capital market partially sees through this inaccuracy, as stock prices react less to overprecise forecast revisions. By revealing a novel behavioral bias of sell-side analysts, our study challenges the view that form precision signals greater accuracy and informativeness.
... In contrast, Hilary and Menzly (2006) hypothesize and find that past forecasting success can lead to lower forecasting accuracy in the future. Drawing on self-attribution theory, they argue that analysts who successfully forecast earnings may attribute too much of their success to their ability and too little of their success to chance. ...
... As a result, analysts become overconfident and place too much weight on their private signals and too little weight on public signals. Consistent with self-attribution theory, Hilary and Menzly (2006) find that analysts who predicted earnings more accurately in the previous four quarters tend to be less accurate and deviate more from the consensus in their subsequent forecasts. 94 This study zooms in on the decision-making process of analysts and presents evidence of dynamic overconfidence. ...
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This paper develops a unified framework to synthesize the growing stream of positive research on the role of individual decision makers in shaping observed accounting phenomena. This line of research recognizes two central ideas in behavioral economics. First, individual behavior depends not only on economic incentives and accessible information but also on individual preferences, ability, experiences, and other characteristics. Second, the constraints that structure human interactions encompass both formal institutions (e.g., rules, laws, constitutions) and informal institutions (e.g., norms, conventions, rituals). Our review covers a broad set of individuals that are of interest in accounting research: managers, directors, audit partners, analysts, standard setters, politicians, judges, journalists, loan officers, financial advisors, and investors. We aim to understand the systematic effects of individual characteristics on a wide spectrum of accounting phenomena, including financial reporting, disclosure, tax planning, auditing, and corporate social responsibility. We highlight the importance of personal characteristics not only for an individual's own behavior but also for others’ perceptions. Our review mainly focuses on archival research in accounting and provides some thoughts about opportunities for archival empiricists going forward. We also, when feasible, highlight opportunities for future field, survey, and experimental research. A central takeaway from our review is that individual-level factors significantly improve our ability to explain and predict accounting phenomena beyond firm-, industry-, and market-level factors. This article is protected by copyright. All rights reserved.
... An additional laboratory study related to the hot hand effect was that of Hilary and Menzly (2006), which found that analysts who had a streak of successful investments were more likely to become overconfident in their abilities. The overconfidence was found to be a temporary phenomenon and its duration was a factor of the level of success and the length of the streak. ...
... The overconfidence was found to be a temporary phenomenon and its duration was a factor of the level of success and the length of the streak. When the findings of Hilary and Menzly's (2006) study are applied to the CEO position of a firm, the risk of overconfidence becomes multiplied. This overconfidence or hubris will result because the celebrity CEO is given credit for great success even when their inputs may have been modest, so long as the firm is successful as a whole (Andreassen, 1987;McCartney, 1987;Meindl et al., 1985;Rindova et al., 2006). ...
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Our purpose is to investigate and discuss the impact of celebrity CEOs. Numerous CEOs have attained celebrity status through infusion into media coverage. Consequently, CEOs routinely enter into American popular culture. We offer general propositions that successful CEOs gain positive media coverage, and thus gain celebrity CEO status. Subsequently, celebrity CEOs are vulnerable to becoming rigid in their business strategy and also fixate on increasing firms’ corporate social responsibility operatives, both of which are enhanced by narcissism. Under negative conditions (i.e., poor performance, bad press), celebrity CEOs tend to escalate their commitment as opposed to admitting a change is necessary.
... Yet, trader overprecision is not a "static" personality trait, but it changes endogenously with past success and failure Hilary and Menzly, 2006;Merkle, 2017). Models of such success-driven overprecision, (e.g. ...
... Importantly, overprecision is a "dynamic" personality trait which changes endogenously with past performance of traders Hilary and Menzly, 2006;Merkle, 2017). The dynamic nature of overprecision implies a strong interdependency between overprecision and asset price dynamics in which as asset prices go up, so does the overprecision of traders (Daniel and Hirshleifer, 2015;Daniel et al., 1998;Gervais and Odean, 2001). ...
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Overconfidence is one of the most important biases in financial markets and commonly associated with excessive trading and asset market bubbles. So far, most of the finance literature takes overconfidence as a given, "static" personality trait. In this paper we introduce a novel experimental design which allows us to track different measures of overconfidence during an asset market bubble. The results show that overconfidence co-moves with asset prices and points towards a feedback loop in which overconfidence adds fuel to the flame of existing bubbles. (JEL Classification C91 · D84 · G11 · G41)
... The estimated moneyness of the options is then calculated as the stock price divided by the estimated average exercise price minus one. 2 As we are interested in the CEO's decisions to hold options that could have been exercised, we include only exercisable options held by the CEO. Further, we allow the continuous "CEO confidence" measure to vary over time as overconfidence may vary with past experience and performance (Hilary and Menzly, 2006) and, more importantly, because our paper attempts to examine, among others, whether male CEO overconfidence varies with female board representation. ...
... In addition, leverage increases the riskiness of equity-based compensation, and thereby may affect the CEO's decision to hold options. Hilary and Menzly (2006) provide evidence that individuals who have experienced past successes are more likely to display overconfidence. Thus, we use both market (Stock return) and operating (Return on assets) measures to proxy for the CEO's prior performance. ...
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p>We suggest a novel reason why there might be a need for female board representation. Female participation in the boardroom attenuates the CEO's overconfident views about his firm's prospects as we find that male CEOs at firms with female directors are less likely to hold deep-in-the-money options. Further, we argue that female board representation matters for industries where male CEO overconfidence is more prevalent. We find support for our argument as female directors are associated with less aggressive investment policies, better acquisition decisions, and improved financial performance for firms operating in industries with high overconfidence prevalence. We also identify a market failure around economic crises. Firms that do not have (sufficient) female board representation suffer a greater drop in performance as a result of the crisis than those that have female board representation.</p
... Literature focusing on the induction of risk-taking attitude due to overconfidence (Glaser and Weber, 2008;Nosic and Weber, 2010;Barber and Odean, 1998;Hilary and Menzly, 2006;Ricciardi, 2007) posed a positive relationship of the former with the latter. Also, several researchers (e.g., Block and Harper, 1991;Daniel et al., 1998) have reported that overconfidence leads to an overestimation of one's skills which results in excessive trading. ...
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The precedence of behavior bias-based studies with respect to investment is quite prevalent. Hence, a bibliometric analysis of available literature may lead to fresh topics in association with overconfidence bias. The literature ranging between 1970 and 2024 were scanned using terms related to overconfidence in finance as keywords to reach the related publications. After screening, 1327 publications related to overconfidence, 728 documents were identified. Martin Weber emerged as the most cited author. SSRN electronic journal, qualitative research in financial matters and review of behavioral finance have published most cited papers in the field of overconfidence and investment decision. The United States have published highest number of papers and citations, while Germany, India and China have also emerged as nations with highest citations. The United States of America has published highest number of papers with citations. Germany, India and China have also emerged as nations with highly citated papers. Considering year on year growth in the publications, more work may be expected from the arena of overconfidence, and authors of the present study have taken the liberty to suggest a few possibilities that can be explored. Studies with risk tolerance, after pandemic impact, experience and financial/tax literacy, loss aversion and availability bias-based studies may be considered by researchers in accordance to overconfidence.
... 11 Previous studies have identified various personal and professional characteristics that can influence analysts' forecasting behavior, including their political preferences (Jiang et al., 2016), gender (Kumar, 2010), educational background (De Franco and Zhou, 2009), overconfidence (Hilary and Menzly, 2006), general-and firm-specific professional experience (Hong et al., 2000;Mikhail et al., 2003;Clement and Tse, 2005), and adverse macroeconomic experience with the labor market (Clement and Law, 2014. 12 For example, a greater fWHR is associated with dominance, egocentrism, risk-seeking, untrustworthiness, and aggressive behavior (Carré and McCormick, 2008;Carré et al., 2009;Haselhuhn and Wong, 2012;Stirrat and Perrett, 2012;Kamiya et al., 2019). ...
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This study investigates the relationship between analysts’ facial width-to-height ratio (fWHR) and their selected forecast boldness under different conditions (e.g., tournament condition and skill levels). The aim is to determine if fWHR captures innate or calculated risk-taking preferences. Supplementary tests reveal that high-fWHR analysts issuing bold forecasts achieve more favorable outcomes in terms of job promotion and forecast accuracy compared with their low-fWHR peers, providing supporting evidence that fWHR is associated with calculated risk-taking. In addition, tests conducted on stock price non-synchronicity and market reaction to bold forecasts for high- versus low-fWHR analysts suggest that high-fWHR analysts possess more firm-specific private information. JEL Codes: M20, M40, M41, G24
... It is also highlighted that pessimistic investors did not get enough returns in the large risk-taking scenario. Hilary and Menzly (2006) found that investors who accurately forecasted the market trend have greater chances of being overconfident and getting more financial returns. Pikulina et al. (2017) explored the phenomenon of overconfident investors and found that investors' overconfidence leads to more investment whereas unconfident investors failed to take huge risks and lead to underinvestment. ...
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This research aims to understand the influence of behavioural factors on investment decisions in the Pakistan Stock Exchange (PSX). This study gathered primary data using a survey-based questionnaire from 318 individual investors. The issue being investigated in this study is how behavioural elements, such as sentiment, overconfidence, over- and under-reaction, and perceived market efficiency, affect investment choices made on the PSX, with a particular emphasis on the limited predictive power of herd behaviour. The sample data were analysed using partial least square-structural equation modelling (PLS-SEM) based approach. Results indicate that financial knowledge, sentiment, overconfidence, over- and under-reaction, and perceived market efficiency significantly affect the investment decision. Interestingly, herd behaviour does not play a significant role in predicting investment decisions. However, we are certain that this study will provide a better understanding of the relationship between behavioural factors and an investor’s investment decision in Pakistan.
... Daniel et al. (1998) interpret security price momentum as investor overconfidence about their private information, and Gervais and Odean (2001) propose a market model describing how traders' biased learning about their successes leads to overconfidence. Hilary and Menzly (2006) find that analysts who forecasted earnings accurately become overconfident, ending up with less accurate forecasts. ...
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This paper investigates the role of managerial biases in the real effects of limits to arbitrage. In a natural experiment setting with Regulation SHO, we find that the lifting of short sale constraints leads to a significant decrease in CEO confidence for pilot firms, and this result is more pronounced for pilot firms with financial constraints and stronger corporate governance. We further find that the real effects of Regulation SHO documented in the literature are primarily driven by CEOs with low confidence. Diffident CEOs of the pilot firms tend to decrease corporate investments, reduce earnings management, and improve social performance and employee relations following the removal of short sale constraints. Overall, we identify CEO confidence as a behavioral channel through which capital market frictions influence corporate decisions and CEO investments.
... Male and female investors who are single can more clearly see this variation in behavior. According to Gilles & Lior (2006), when analysts are successful in accurately forecasting, they often become overconfident and fail when making future predictions. They found evidence that some asset managers view REITs as an asset class, and that the amount of irrational trading can vary depending on the size of the REIT. ...
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Using behavioral factors (mood, overconfidence, underreaction, overreaction, and herding behavior) as proxy variables in the Vietnamese stock market, this article tries to explore the link between investor demographics (gender, age, experience, and educational ability) and their investment decisions. This study compiles information from a structured questionnaire survey of 400 local, international, institutional, and individual investors in Vietnam. It employed partial multiple regression to examine how investors' demographic variables affected their investment choices using behavioral traits as mediator variables. According to the results, investor emotion, overconfidence, over/underreaction, and herd behavior all have a large impact on investing decisions. Additionally, investors' investing selections are significantly and favorably influenced by their age, gender, and degree of education. Although experience does not have a significant effect on financial decisions, investors start to ignore emotional aspects as they become more experienced.
... However, untabulated results show that analysts' individualism is not significant in explaining the likelihood or the accuracy of forecast revisions made before earnings announcements. 27 Analysts with greater forecasting ability, as proxied by past accuracy, tend to be overconfident (Hilary and Menzly 2006) and bolder (Clement and Tse 2005). Thus 27 Specifically, we collect a sample of quarterly earnings forecasts issued in the [3,3] window surrounding firms' earnings announcements. ...
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We examine how the culture of origin of sell-side financial analysts in the United States influences their forecasting. We find that analysts from individualistic cultures are more likely to issue bold earnings forecasts and stock recommendations than analysts from collectivist cultures. Individualistic (collectivist) analysts’ tendency to overweight (underweight) their private information at least partly explains the results. The effect of culture decreases with the analysts’ professional skills and their exposure to the U.S. culture but increases with task difficulty. For market consequences, short-window market reactions are stronger to bold reports by collectivist analysts than to those by individualistic analysts, consistent with the analysts’ differential weighting of their private information. On average, however, a higher level of analyst individualism is associated with lower stock price synchronicity of the firm covered, indicating that more firm-specific information is impounded in the stock price. Our study extends research on the effect of national culture in the capital market by demonstrating how individualism, a central element of culture, affects analysts’ information processing and the value of their work.
... Additionally, we highlight that, not only individual investors, but also institutional investors, are responsible for sentiment-induced demand shocks. Similar view has also been argued by several prior studies, for example, some showing that even professionals such as analysts and fund managers are affected by cognitive biases (Brown and Cliff (2004); Hilary and Menzly (2006) ;Taffler, Spence, and Eshraghi (2017);Hirshleifer et al. (2019)), and more notably, DeVault, Sias, and Starks (2019) find that commonly used sentiment metrics like BW capture sentiment of institutional investors rather than individual ones. ...
... As a result, the limited attention these studies find occurs because analysts voluntarily 5 The nonbehavioral factors considered in the literature include the analyst's forecasting experience (e.g., Clement 1999), the coverage portfolio complexity (e.g., Clement 1999), the prestige of the brokerage (e.g., Clement 1999), the geographical location (e.g., Malloy 2005;O'Brien and Tan 2015), the analyst's industry expertise (Bradley et al. 2017a), the analyst's career concerns (e.g., Hong and Kubik 2003;Harford et al. 2019), the analyst's cultural background (e.g., Du et al. 2017;Merkley et al. 2020), and the changing business model of sell-side research (Drake et al. 2020). 6 Examples of this literature include a focus on attribution bias (Hilary and Menzly 2006), anchoring bias (Cen et al. 2013), seasonal affective disorder (Lo and Wu 2018), weather-induced inactivity (DeHaan et al. 2017), availability heuristic (Bourveau and Law 2021), and the affect heuristic (Antoniou et al. 2021). Other academic research has studied the role of characteristics such as the economic conditions when analysts grew up (Clement and Law 2018) and their political ideology (Jiang et al. 2016) in permanently shaping analysts' future forecasting toward conservative forecasts. ...
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We construct a distraction measure based on extreme industry returns to gauge whether analysts’ attention is away from certain stocks under coverage. We find that temporarily distracted analysts make less accurate forecasts, revise forecasts less frequently, and publish less informative forecast revisions, relative to undistracted analysts. Further, at the firm level, analyst distraction carries real negative externalities by increasing information asymmetry for stocks that suffer from a larger extent of analyst distraction during a given quarter. Our findings thus augment our understanding of the determinants and effects of analyst effort allocation and broaden the literature on distraction and information spillover in financial markets.
... One strand of research focuses on analysts' incentives, including compensation (Hayes, 1998;Lehmer et al., 2022;Malmendier & Shanthikumar, 2014), promotion and turnover (Hong & Kubik, 2003), underwriter affiliation and investment banking relationships (Lin & McNichols, 1998), and currying favor with management for access to private information (Mayew, 2008). Another strand of research investigates a cognitive bias explanation for optimism, which includes under-/overreaction to bad/good news (Easterwood & Nutt, 1999) and overconfidence (Hilary & Menzly, 2006). Still, little is known about what factors help to improve analyst forecast quality. ...
Article
We examine how short sellers affect financial analysts’ forecast behavior using a natural experiment that relaxes short‐sale constraints. We find that increased ease of short selling improves analyst earnings forecast quality by reducing forecast bias and increasing forecast accuracy. The improvements can be explained by both the disciplining pressure from short sellers and increased price efficiency from incorporating information in a timely manner. Although it is well documented that financial analysts can affect investors, our paper provides novel evidence on how sophisticated investors, short sellers, can affect analysts. This article is protected by copyright. All rights reserved
... Overestimation often leads to overconfidence in trading and that in turn neutralizes as the investor gains more experience (Gervais & Odean, 2001). Overconfident investors were found to be accurate in forecasting returns subsequent to their success; however, they tend to be less accurate in the subsequent prediction (Hilary & Menzly, 2006). ...
Chapter
This chapter is an attempt to analyse the key factors of adoption of alternative business models by the handicraft artisans during COVID-19 pandemic. This paper is a part of doctoral study and is based on the part of primary research conducted by the scholar. The study primarily analyses the strength of the relationship of the factors. A structured questionnaire was employed to collect data for conducting the study. Descriptive statistics, correlation and multiple linear regressions have been used as statistical tools for analysis. The findings of the study demonstrate the linkage and effect of critical aspects on the performance of alternative business models, resulting in conclusions that leave room for future research. The novelty of this study is that it has made an initial attempt to identify the key factors of adoption of the alternative business model for the artisans. The study is limited to a specific field of the craft sector. The policy-makers will have substantial theoretical consequences for the development of the artisans regarding their alternative business model. It is important to improve artisan’s entrepreneurial skills and capabilities to strengthen them in the global market today.KeywordsAlternative businessHandicraft sectorArtisanCOVID-19Social media
... Prior research illustrates that overconfidence is a constant personality trait as it relates to long-term demographic characteristics such as gender (e.g., Bailey, Kumar, & Ng, 2011;Huang & Kisgen, 2013). However, the intensity of overconfidence can increase if individuals experience successes (e.g., Hilary & Hsu, 2011;Hilary & Menzly, 2006). We therefore view overconfidence as a constant characteristic with potential changes in intensity. ...
... A substantial body of research in economics and nance demonstrates a link between overcon dence of individuals and faulty individual investment decision making. is phenomenon has been observed in chief executives (Roll, 1986;Tate, 2005, 2008;Bille and Qian, 2008) as well as private and institutional traders (Barber and Odean, 2001;Deaves et al., 2009), security analysts (Hilary and Menzly, 2006) and experiment participants (Camerer and Lovallo, 1999;Biais et al., 2005;Di rich et al., 2005, among ...
... We make no assumptions about the prior performance of more experienced vs. less experienced managers. At the same time, specific characteristics of managers such as past successes (Hilary and Menzly 2006), gender (Huang and Kisgen 2013), or the desire for status (Anderson et al. 2012) can be associated with managerial overconfidence. Exploring these different sources of overconfidence is beyond the scope of this study and provides avenues for future research. ...
Article
In this study, we examine how the prior experiences of decision makers systematically influence their assessment of and responses to negative performance feedback. We posit that, although greater and more specialized experiences enable managers to build relevant knowledge and expertise in specific domains, they also make them overconfident in their abilities and strategies. Such experience-induced overconfidence further leads to distortions in the performance assessment process, hindering a firm’s ability to recognize and respond to poor performance. We empirically test these arguments in the context of U.S. mutual fund managers making investment decisions in response to fund performance below aspirations. As hypothesized, we find that more experienced and more specialized fund managers change their investment decisions less when faced with negative performance feedback than managers who are less experienced and less specialized. In additional analyses, we further show that the lower responsiveness of more experienced (specialized) managers is associated with the fund’s lower future performance, supporting our proposed theoretical mechanism (overconfidence). This study augments existing performance feedback research by showing how decision makers’ prior experience can impede problem-solving behavior in organizations. It also contributes to the literature on human capital and organizational learning by documenting an unintended consequence of accumulated human capital on firm adaptive behavior. Funding: This work was supported by INSEAD research & development funds. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.1605 .
... Financial advisors are blamed for a negative performance, which implies a tendency to avoid taking responsibility for failure and to blame others. 5 The self-attribution bias leads investors to become overconfident and, thus, they underperform (Barber and Odean, 2000); moreover, there is empirical evidence on the relationship between the self-attribution bias and overconfident behavior among managers (Billett and Qian, 2008;Doukas and Petmezas, 2007;Kim, 2013;Libby and Rennekamp, 2012), analysts (Hilary and Menzly, 2006), and investors (Czaja and Röder, 2020). Czaja and Röder (2020) found empirical evidence that traders become overconfident due to self-attribution bias and, thus, demonstrated higher levels of investment underperformance. ...
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This study explicates the role of behavioral bias in financial advice seeking. Investors with behavioral biases are prone to making poor financial decisions, which advisors may help to eradicate. Drawing on an online survey of experienced individual investors, this study examines how behavioral bias affects financial advice seeking. The three biases identified in this study influence advice seeking differently: overconfident investors tend to invest by themselves, while investors with selfprotection bias and/or mental accounting bias are more likely to seek financial advice. The pedagogical implication is to address these biases to the public in financial literacy initiatives.
... For example, Hackbarth (2009) models a reversed U-shaped relationship between overconfidence and the leader's propensity to make capital structure decisions that are in the interest of shareholders. Goel and Thakor (2008) also postulate that moderate overconfidence diminishes underinvestment and increases 11 Several empirical validations of the self-attribution hypothesis can be found in the management literature: Daniel, Hirshleifer, and Subrahmanyam (1998) show that investors become overconfident after several valuable investments; Hilary and Menzly (2006) demonstrate how successful analysts become overconfident by taking too much credit for their previous accurate forecasts; and Hilary and Hsu (2011) and Hilary et al. (2016) relate leader overconfidence to the experience of short-term forecasting success. Moreover the mechanism of self-attribution leading to the development of overconfident beliefs has been largely invoked to explain merger and acquisition (M&A) decisions made by corporate leaders (Billett & Qian, 2008;Hayward & Hambrick, 1997). ...
Article
Can CEO overconfidence help explain pay inequalities in top management teams? Tournament literature argues that pay gaps between different executive echelons increase competition among executives in the goal to replace the incumbent CEO and by so doing incentivize all top management team members to provide more effort. The increase in incentives can in turn lead to firm-level performance improvement especially in corporations where agency conflicts are severe. However, entrenchment seeking CEOs can be reluctant to this kind of incentivizing mechanisms. In this paper, we model such a context and show how overconfident CEOs are more likely to administer tournament-like incentives than realistic CEOs. Hence, we describe a novel and underexplored way in which CEO overconfidence can be beneficial to shareholders.
... The mean OC ranged from 0.05 to 0.47, meaning that our experts were well-calibrated. Previous research showed that experts are often overconfident (Hilary and Menzly 2012;Wagenaar and Keren 1985), but this was not the case with our sample ...
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The main aim of this paper was to examine the consistency of experts (N = 71) in evaluation in high-stakes real-life decision-making, and how their consistency relates to other psychological constructs such as cognitive reflection and overconfidence. A pool of top Slovak experts was assembled, and the AHP method for eliciting policy priorities was applied. Moreover, the cognitive reflection and overconfidence of experts were measured. The consistency of experts tended to improve over time and this improvement occurred also in exercises with increased cognitive demand. Improved consistency may have resulted both from the learning effect and from better comprehension of one’s preferences. However, there was no correlation between the consistency of experts and their cognitive reflection or overconfidence. The results suggest that for technological and economic development of any state it is beneficial for real experts to decide these issues. However, experts are not perfect and free from mistakes; therefore, attention should be paid to the selection process of future experts and their learning environment.
... Ritter Jay [196] in the year 2006 and Hilary and Menzly [105] establish that market experts also act consistently with different psychologist view regarding human behavior. Behavioral finance opposes the traditional assumption of expected utility intensification of rational investors in an efficient market. ...
... Existing literature on analyst optimism has provided behavioral bias explanations as well as incentive-based explanations (Malmendier & Shanthikumar, 2014). For example, Hilary and Menzly (2006) argue that forecast optimism is due to the analysts' self-attribution bias and overconfidence. Cen et al. (2013) attribute it to the analysts' anchoring bias toward the industry norm. ...
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Using a manually collected database of Shenzhen Stock Exchange listed firms from 2013 to 2015, we examine the key characteristics of firms’ private meetings and their effects on analysts’ reports. We show that the presence of managers, a smaller number of meeting participants, and discussing questions in more categories are associated with more accurate and less optimistic short-term forecasts during the hosting periods following the meeting. Our results suggest that private and small group conversations between managers and analysts can be significant information channels in these meetings. In particular, we show that the short-term earnings forecast is more accurate and less optimistic during hosting periods after these meetings in general, but recommendations are still biased upwardly. These results are robust regardless of whether the analyst attend meetings or whether the meeting is hold onsite, providing further evidence that private conversations with managers may be a more effective information channel than observing firms’ operations during site visits.
... In comparison to investors, there is reason to expect that analysts are relatively less subject to extrapolative bias. 3 Investors may be prone to extrapolation biases due to the 1 In a seminal paper, Asch (1946) finds that if a person is described as "intelligent, industrious, impulsive, critical, stubborn, [and] envious," people form a more positive impression of that person than when the descriptors are used in reverse. 2 Systematic biases in sell-side equity analysts' forecasting behavior seem to derive in part from agency problems (see Bradshaw (2011) for a survey of the literature) and in part from psychological biases such as anchoring (Cen, Hilary, and Wei, 2013), overconfidence (Hilary and Menzly, 2006), and decision fatigue (Hirshleifer et al., 2019). 3 Analysts are incentivized to produce accurate forecasts and recommendations, because forecast accuracy is important for an analyst's career and it allows them to achieve and maintain all-star status (Stickel, 1992;Hilary and Hsu, 2013;Groysberg, Healy, and Maber, 2011). ...
Article
We present evidence of first impression bias among finance professionals in the field. Equity analysts’ forecasts, target prices, and recommendations suffer from first impression bias. If a firm performs particularly well (poorly) in the year before an analyst follows it, that analyst tends to issue optimistic (pessimistic) evaluations. Consistent with negativity bias, we find that negative first impressions have a stronger effect than positive ones. The market adjusts for analyst first impression bias with a lag. Finally, our findings contribute to the literature on experience effects. We show that a set of professionals in the field, equity analysts, apply U-shaped weights to their sequence of past experiences, with greater weight on first experiences and recent experiences than on intermediate ones.
... Tends to overestimate certain conditions of one's information is the definition of overconfidence (Rouchier & Tanimura, 2012). Someone will be more confident and less sensitivity towards success error when they always keep repeating on certain things and give the best result in their life or task (Hilary & Menzly, 2006) and some expressed that less confidence is when they were not capable in managing their learning (Klasen, 2007). Past research by Aderanti et al. (2013) proved that students tend to be procrastinators, especially in academic procrastination if they have high confidence level or overconfidence. ...
Article
Procrastination is a very common and becomes a problem among students nowadays. Procrastination will give the negative effect on the learning style of students, resulting in their low achievements in performing tasks and examination of maybe it will cause failure in the examinations, resulting in anxiety and also depression next lowering in their morale. This study aims to develop an index of procrastination and to model the factors of procrastination among university students. The factors that have been considered in this study are self-esteem, lack of motivation, overconfidence and social problems. The sample of 203 students of year 1 and year 3 had been selected using the stratified sampling. In developing the index, the weightage is very important. The index developed has been categorized into 4 categories, Low Academic Procrastination (0.24 and below), Average Academic Procrastination (0.25 to 0.50), Above Average Academic Procrastination (0.51 to 0.75) and High Academic Procrastination (0.76 and above). Study also reveal that there is no significant mean different in Gender, Year of Study and Type of Program. Furthermore, from the Pearson’s Correlation Analysis result found that all the explanatory variables (lack motivation, self-esteem, confidence level and overconfidence) having the positive relation relationship with the dependent variable even it contribute the weak relationship. Among the four of independent variables only two variable were significant and 5 percent level of significance which are Lack of motivation and Overconfidence. Finding revealed that variable lack of motivation is the most influent factor towards academic procrastination.
... Overconfident investors subsequently tend to become even more overconfident in their future investments. Meanwhile, financial losses are attributed to environmental circumstances, such as unfavorable macroeconomic developments or simply bad luck, with the investor's degree of overconfidence remaining constant [58], [59]. Professionals were also found to be as likely as laypersons to express overconfidence in making economic decisions as well as reevaluating the quality of their own previous decisions in hindsight [60]. ...
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Successful design of human-in-the-loop control systems requires appropriate models for human decision makers. Whilst most paradigms adopted in the control systems literature hide the (limited) decision capability of humans, in behavioral economics individual decision making and optimization processes are well-known to be affected by perceptual and behavioral biases. Our goal is to enrich control engineering with some insights from behavioral economics research through exposing such biases in control-relevant settings. This paper addresses the following two key questions: 1) How do behavioral biases affect decision making? 2) What is the role played by feedback in human-in-the-loop control systems? Our experimental framework shows how individuals behave when faced with the task of piloting an UAV under risk and uncertainty, paralleling a real-world decision-making scenario. Our findings support the notion of humans in Cyberphysical Systems underlying behavioral biases regardless of -- or even because of -- receiving immediate outcome feedback. We observe substantial shares of drone controllers to act inefficiently through either flying excessively (overconfident) or overly conservatively (underconfident). Furthermore, we observe human-controllers to self-servingly misinterpret random sequences through being subject to a "hot hand fallacy". We advise control engineers to mind the human component in order not to compromise technological accomplishments through human issues.
... Similarly, Driskill et al. (2020) find that when analysts face concurrent earnings announcements across their coverage universe on the same day, they limit their 5 The non-behavioral factors considered in the literature include (but are not limited to) the analyst's forecasting experience (e.g., Clement 1999), the coverage portfolio complexity (e.g., Clement 1999), the prestige of the brokerage house (e.g., Clement 1999), the geographical location (e.g., Malloy 2005; O'Brien and Tan 2015), the analyst's industry expertise (Bradley, Gokkaya, and Liu 2017a), the analyst's career concerns (e.g., Hong and Kubik 2003;Harford et al. 2018), the analyst's cultural background (e.g., Du, Yu, and Yu 2017;Merkley et al. 2020), and the changing business model of sell-side research (Drake, Joos, Pacelli, and Twedt 2019). 6 Examples of this literature include a focus on attribution bias (Hilary and Menzly 2006), anchoring bias (Cen, Hilary and Wei 2013), seasonal affective disorder (Lo and Wu 2018), weather-induced inactivity (deHaan, Madsen, and Piotroski 2017), availability heuristic (Bourveau and Law 2020), and the affect heuristic (Antoniou, Kumar, and Maligkris 2020). Other academic research has studied the role of characteristics such as the economic conditions when analysts grew up (Clement and Law 2018) and their political ideology (Jiang, Kumar, and Law 2016) in permanently shaping analysts' future forecasting behavior towards conservative forecasts. ...
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We construct a measure of analyst-level distraction based on analysts' exposure to exogenous attention-grabbing events affecting firms under coverage. We find that temporarily distracted analysts achieve lower forecast accuracy, revise forecasts less frequently, and publish less informative forecast revisions relative to non-distracted analysts. Further, at the firm level, analyst distraction carries real negative externalities by increasing information asymmetry for stocks that suffer from a larger extent of analyst distraction during a given quarter. Our findings thus augment our understanding of the determinants and effects of analyst effort allocation, and broaden the literature on distraction and information spillover in financial markets.
... The coefficient has a value of 0.062, 0.047, and 0.087 for regression (1), (2), and (3) effect over the CEO's tenure. However, it could be argued that overconfidence varies with past experience and performance (Hilary and Menzly, 2006;Billett and Qian, 2008). ...
... For example, Hackbarth (2009) models a reversed U-shaped relationship between overconfidence and the leader's propensity to make capital structure decisions that are in the interest of shareholders. Goel and Thakor (2008) also postulate that moderate overconfidence diminishes underinvestment and increases 11 Several empirical validations of the self-attribution hypothesis can be found in the management literature: Daniel, Hirshleifer, and Subrahmanyam (1998) show that investors become overconfident after several valuable investments; Hilary and Menzly (2006) demonstrate how successful analysts become overconfident by taking too much credit for their previous accurate forecasts; and Hilary and Hsu (2011) and Hilary et al. (2016) relate leader overconfidence to the experience of short-term forecasting success. Moreover the mechanism of self-attribution leading to the development of overconfident beliefs has been largely invoked to explain merger and acquisition (M&A) decisions made by corporate leaders (Billett & Qian, 2008;Hayward & Hambrick, 1997). ...
Article
This paper analyzes the relationship between leader power and overconfidence in the corporate context. Building on psychology research, we postulate that by activating self-serving cognition and illusion of control, the amount of power allocated to the leader of an organization positively influences the probability that he/she will exhibit overconfident beliefs. Using various measures of both formal and symbolic leader power we provide corroborating evidence for such endogeneous - power-based - origin of leader overconfidence. Then, we develop an empirical framework that allows to test the endogeneity-free effects of leader overconfidence on firm performance. Namely, we use a propensity score matching technique to construct a sample of reasonable counterfactuals (i.e., leaders in similar power-allocation conditions who do not exhibit overconfidence). As a result, we provide dissenting evidence about the effects of overconfidence, showing an economically and statistically significant positive influence of overconfidence on firm performance.
... Finally, to compute the average percentage moneyness of the options, we divide the realizable value per option by the estimated average exercise price. We use this continuous time-variant variable as a measure of CEO confidence because previous literature argue that overconfidence varies with past experience and performance (Hilary and Menzly, 2006;Billett and Qian, 2008) and we also try to capture the interaction effect of the variation between CEO overconfidence and female board representation over time. ...
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Is the moderating effect of female board representation on the CEO overconfidence sufficiently strong to alter the firms' excess cash decisions? We address this question using data on 1,163 US-listed firms for 2000-2017. Prior research posits that overly confident CEOs hold less cash compared to their rational counterparts. We show that having more female directors on the board not only stops the decline in excess cash due to the overconfident CEO but also increases excess cash holdings in those firms. Better female board representation enhances corporate decision making through effective monitoring and thus, taming the CEO's biased behavior i.e., overconfidence.
... The overconfidence effect was demonstrated in many populations and work domains, such as: clinical psychologists (Oskamp, 1965), drivers (Svenson, 1981), financial analysts, investors, or stock market specialists (Staël von Holstein, 1972;Hilary & Menzly, 2006;Menkhoff, Schmeling, & Schmidt, 2013;Grežo, 2017), statisticians (Wagenaar & Keren, 1985), basketball players (McGraw, Mellers, & Ritov, 2004), managers (Malmendier & Tate, 2005a). ...
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Prior entrepreneurship research shows that individuals often possess biased expectations regarding their chances of success in the market compared to objective reality, as well as to their success and profitability compared to their peers. This distorted, biased view on one's chances of success is referred to as overconfidence. The present study addresses the effect of overconfidence on corporate decision-making with regard to the methodology used in economic and psychological studies. Current research provides contradictory and inconclusive results about the effect of overconfidence on various Chief Executive Officers' decisions and profitability. In this study, I try to explain this inconclusiveness by outlining some of the most important methodological issues in the overconfidence research. In psychological literature, there is a wide consensus among researchers about the robustness of overconfidence in human reasoning. This cognitive bias has been demonstrated in many populations and work domains; like clinical psychologists, drivers, financial analysts, investors, stock market specialists, statisticians, basketball players, or managers. In the literature, overconfidence appears mainly in three different constructs-calibration of probabilities, overestimation, and overplacement. The calibration of probabilities is measured by comparing individuals' subjective probability judgments with the real objective probability. Overestimation is based on comparing individuals' performance in a particular task with their belief about how they will perform or how they performed. Finally, overplacement is measured by comparing individuals' belief about their own performance with the belief about the performance of other individuals. According to these three constructs, overconfidence can be defined as a systematic tendency to overestimate one's own ability to make accurate forecasts, or as an overestimation of one's own performance, or knowledge, compared to his/her actual performance, or others' knowledge. In recent decades, authors from economic disciplines started to omit the direct measurement of overconfidence and instead they have often searched for various indirect variables that could serve as proxies for overconfidence; like holding options beyond rational thresholds, purchasing stocks of one's own company despite the high exposure to risk, or chief executive officers' press portrayals. Additionally, the effect of overconfidence has started to be linked and sometimes confused with other similar concepts like optimism or illusion of control. Authors often use findings from multiple different constructs as a basis for their hypotheses about the effect of overconfidence in corporate decision-making. Moreover, they often use different measurement tools or other proxies for examining overconfidence compared to the previous studies they reported. This confusion of different forms of overconfidence together with different operationalizations causes difficulty in integrating knowledge about particular overconfidence constructs. In this paper, I describe, firstly, the origins and differences in operationalization between economic and psychology studies. Several widely-used measures and proxies of overconfidence in economic research are described and the diversity of using these measures in previous studies is showed. Subsequently, I discuss how different forms of overconfidence impact the decision-making and performance of entrepreneurs. In this part, the study focuses on the three most frequent areas that are reflected in the current literature; namely the effect of overconfidence on financial decision-making, firm profitability, and entrepreneurs' innovativeness. It is showed that studies in these areas often bring contradictory findings; mainly in the context of risk-taking, debt usage, or dividend payment, and this contradiction seems to result mostly from using different operationalizations of overconfidence. The final part of the study outlines several possible ways how problems with methodology and inconclusiveness in the overconfidence research could be solved. Firstly, is the importance of finding and using a valid direct overconfidence measure in entrepreneurship research. The ability to make an accurate reasoning about one's own Individual and Society, 2018, Vol. 21, No. 2, pp. 1-15. Explaining the ambiguous impact of overconfidence on corporate decision-making: a critique of the research methodology 2 performance or abilities depends on how the question/task format is designed, what information about testing an individual possesses, how their reasons will be evaluated by researcher, or what reference group will be used in the evaluation. Considering this, many overconfidence measures do not meet these conditions. Moreover, indirect measures of overconfidence not only miss these conditions, but they also miss the main principle of direct overconfidence measures, which is the comparison of one's reasoning about one's performance or abilities with one's real performance or abilities. Therefore, it is questionable whether indirect measures and proxies used in economic literature really measure overconfidence, i.e. they investigate the biased reasoning about one's performance, ability, or knowledge. Considering this validity issue, the direct measures for examining overconfidence should be preferred in future research. They could be focused on a direct examination of individuals' beliefs about their performance, knowledge, and abilities necessary for any entrepreneurial activity; like managerial or functional skills (finance, distribution, sales, marketing, leadership, etc.). The second way to address methodology issues in the overconfidence research is to test whether and to what extent some of the widely-used indirect overconfidence measures correlate with direct measures. Economic studies often use two or more overconfidence measures, but most of these measures are indirect. Combining indirect and direct measures could help to find out whether indirect measures are really associated with biased reasoning about one's performance or abilities. Finally, the third way to solve the knowledge integration problem is conducting meta-analyses regarding the effect of overconfidence on specific CEOs' corporate decision-making. In these analyses the type of overconfidence measurement should be examined as a moderator of the effect of overconfidence on corporate decision-making. This could identify how different overconfidence measures affect specific corporate decisions and hopefully explain some contradictory findings in current literature. Besides the three main proposals, there are also other more general crucial factors that need to be taken into account when designing measurement tools or improving validity and reproducibility of the overconfidence research methodology. This concerns mostly various questionable research practices; like selective reporting of variables or results, p-hacking, or harking, in order to support the widespread notion of robustness of overconfidence in human reasoning and decision-making. Considering the proposed ways of improving the methodology in overconfidence research, a joint and vital step is to properly distinguish overconfidence constructs and also other related constructs like optimism, or illusion of control.
... These findings implied that investors at Rwanda stock market suffered from confirmatory bias. This is because when investors have already made their choices only search for information to confirm their preconceptions A study by [10] also showed that an investor may suffer not merely from overconfidence, but also from wrongness when the investor's confirmatory bias is severe enough. [17] study on the other hand found that show that an investor exhibiting confirmatory bias may come to believe with near certainty in a false hypothesis despite receiving an infinite amount of information. ...
... In their relations with themselves, hubristic CEOs tend to have a grandiose sense of self and make excessive investments for their own 'self' (Park et al. 2018;Petit and Bollaert 2012). Hubristic CEOs lean too heavily on their own judgment and overestimate the probability of their firm's success (Hilary and Menzly 2006). Due to their excessive optimism and lack of prudent consideration, hubristic CEOs are more likely to underestimate the risks faced by the firms and to think that adverse events have limited influence on them (Hiller and Hambrick 2005). ...
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This study focuses on CEO hubris and its effect on corporate unethical behaviour—pollution in particular, and in addition examines critical institutional contingencies [state ownership (SO), political connection (PC) and industrial competition] which may moderate this effect. With data from over-polluting listed firms based on the real-time pollution monitoring system in transitional China from 2015 to 2017, we find that CEO hubris is significantly positively related to firm pollution, and that the moderating role of SO is not significant, that PC positively moderates the hubris–pollution relationship and that industrial competition negatively moderates this relationship. These findings contribute to research on the upper echelon theory, institutional theory and the growing literature on emerging economies.
... Girandola and Michelik (2008) assume that the leaders strongly committed tend to be more optimistic. Hilary and Menzly (2006) added that financial analysts in situations of overconfidence and optimism (emotional commitment high level) tend to move away from the consensus predictions apart by delivering the reality of more than 10%. The same idea, always take an engaged leader that his company is undervalued by the market. ...
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This research examines the determinants of firms" capital structure introducing a behavioral perspective that has received little attention in corporate finance literature. After discussing the theoretical linking between firm capital structure choice and the CEO"s attitude and behavior, we are showing on empirical grounds the relationship between the manager"s behavior toward the capital structure preferences and his cognitive commitment level. The article explains that the main cause of capital structure choice is CEO commitment level. We introduce an approach based on Decision Tree Analysis technique with a series of semi-directive interviews. The originality of this research is guaranteed since it traits the behavioral corporate policy choice in emergent markets. In the best of knowledge this is the first study in the Tunisian context that explores such area of research. Results show that psychological dimension introduced in the capital structure analysis has enriched the Pecking Order Theory (POT) and the Static Trade Off Theory (STT) CEO (CEO affective commitment) prefer to finance their projects primarily through internal capital, by debt in the second hand and finally by equity.
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We use a large pictorial sample of Chinese financial analysts to test the association between facial width‐to‐height ratio (fWHR) and performance in men. Financial analysts offer an ideal setting for our investigation because we can objectively track individual analysts’ behaviors and performance. We find that high‐fWHR analysts are more likely to conduct corporate site visits and they exhibit better performance. The positive fWHR‐performance association survives a battery of robustness checks and the association is more pronounced for analysts with lower status, for firms with higher uncertainty, and for analysts facing more intense competition. Our results suggest that the dominant trait predicted by fWHR is achievement drive. This article is protected by copyright. All rights reserved
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In this paper, we provide a comprehensive summary of persuasion theories from a variety of fields (e.g., psychology, marketing, and economics) and describe how these theories can enhance our understanding of how investors process and respond to financial communications (e.g., firm disclosures and analyst research reports). We draw on dual-process theories of persuasion to describe the circumstances under which an investor's response to a financial disclosure is likely to represent the investor's intuition or reflect more deliberate and analytical processing of financial information. Examples from the financial accounting literature are used to illustrate how dual-process thinking and reasoning operate within a financial reporting domain. In addition, we offer broad suggestions on how financial accounting researchers can use the psychology of persuasion to understand and form empirical predictions about investor processing of and reaction to managers' and analysts' financial disclosures.
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This article aims to reestablish the long-standing conjecture that conformity is high at the middle and low at either end of a status order. On a theoretical level, the article clarifies the basis for expecting such an inverted U-shaped curve, taking care to specify key scope conditions on the social-psychological orientations of the actors, the characteristics of the status structure, and the nature of the relevant actions. It also validates the conjecture in two settings that both meet such conditions and allow for the elimination of confounding effects: the Silicon Valley legal services market and the market for investment advice. These results inform our understanding of how an actor's status interacts with her role incumbency to produce differential conformity in settings that meet the specified scope conditions.
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Investigated the attribution of causation in 2 experimental situations, (a) a participant condition in which Ss taught 2 fictitious students for 4 trials, and (b) an O condition in which Ss received information in story form about a situation similar to the participant condition. While 1 child always performed well, the 2nd child's performance either remained poor (low-low), improved (low-high), or deteriorated (high-low). Ss in the participant condition attributed the low-high child's success to themselves, while O condition Ss attributed success to characteristics of the child. Ss in both conditions tended to attribute the low-low and high-low children's failure to external factors (situational demands or characteristics of the child). Ss' sentiments toward the children generally were positively related to overall performance. However, the low-low child was evaluated higher than the high-low child in the participant condition, while the high-low child was evaluated higher in the O condition. Results suggest the occurrence of ego-relevant modes of attribution among participants, which are absent among Os. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Investigated the impact of task importance on the causal attributions for success and failure on a bogus social-perceptiveness task which was given to 52 undergraduates. Consistent with previous research, Ss assumed more personal responsibility for success than failure. Moreover, the more valid and important the social-perceptiveness test was presented as being, the more pronounced was the effect of outcome on the Ss' attributions. Results favor a motivational as opposed to an information-processing explanation of asymmetries in causal attribution. (18 ref) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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In a simulated teaching situation 80 Ss taught arithmetic concepts to fictitious "students" who then performed high (Student A) or low (Student B) on a related task. The cause of this performance was perceived as internal to the students; and positive characteristics were attributed to A, negative to B. Sentiments expressed for A were different from B. Ss were then informed that A's "real" characteristics were positive and that B's characteristics were either positive (equivalent to A) or negative. They presented a second concept on which A again performed high and B performed either high or low. When B's second performance was high, Ss tended to perceive themselves as responsible for the improvement, but perceived B as responsible when his performance remained low. There was also less difference between the sentiments expressed for A and B when B improved. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Examines the calibration of expert probabilistic predictions "in the wild" and assesses how well the heuristics and biases perspective on judgment under certainty can account for the findings. Then this chapter reviews alternate theories of calibration in light of the expert data from 5 domains (medicine, meteorology, law, business, and sports). (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Two empirical judgment phenomena appear to contradict each other. In the revision-of-opinion literature, subjective probability (SP) judgments have been analyzed as a function of objective probability (OP) and generally have been found to be conservative, that is, to represent underconfidence. In the calibration literature, analyses of OP (operationalized as relative frequency correct) as a function of SP have led to the opposite conclusion, that judgment is generally overconfident. Reanalysis of 3 studies shows that both results can be obtained from the same set of data, depending on the method of analysis. The simultaneous effects are then generated and factors influencing them are explored by means of a model that instantiates a very general theory of how SP estimates arise from true judgments perturbed by random error. Theoretical and practical implications of the work are discussed. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Describes 3 experiments with a total of 277 male undergraduates. All Ss were pretested on the Revised Mehrabian Achievement Scale for males. Exp. I demonstrated that Ss who differ in achievement level also differ in their manner of accounting for the causes of their outcome at a digit-guessing task. High achievers more frequently attributed their successes or failures to the degree of effort expended than did either intermediate or low achievers, while intermediate achievers ascribed outcomes to luck more often than either of the extreme achievement groups. In Exp. II and III, the attributions typical of high and low achievers were induced in 2 experimental groups, with the prediction that these groups would diverge behaviorally in the same way as uninstructed high and low achievers. In both digit-guessing and anagram tasks, high-achieving Ss performed as predicted, while low-achieving Ss failed to be differentially affected by the 2 instructions. Possible explanations for this pattern of results are discussed. (16 ref.) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Reports 6 experiments which relate achievement motivation to causal ascription. Exp. I, II, and III revealed that the evaluation of achievement-related outcomes is positively related to the amount of expended effort, but inversely related to level of ability. Evaluative differences between social classes (Exp. II), and disparities between self- and other-judgments (Exp. III) also were examined. In Exp. IV and V individual differences in locus of causality were related to level of achievement needs. Results indicate that Ss high in resultant achievement motivation are more likely to take personal responsibility for success than Ss low in achievement motivation. Clear differences in perceived responsibility for failure were not exhibited between the 2 motive groups. In Exp. VI risk-preference behavior and J. W. Atkinson's (see 33:2) theory of achievement motivation were construed in attribution theory language. It is contended that cognitions about causality mediate between level of achievement needs and performance. (36 ref.) (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Seeking advice is a basic practice in making real life decisions. Until recently, however, little attention has been given to it in either empirical studies or theories of decision making. The studies reported here investigate the influence of advice on judgment and the consequences of advice use for judgment accuracy. Respondents were asked to provide final judgments on the basis of their initial opinions and advice presented to them. The respondents’ weighting policies were inferred. Analysis of the these policies show that (a) the respondents tended to place a higher weight on their own opinion than on the advisor’s opinion (the self/other effect); (b) more knowledgeable individuals discounted the advice more; (c) the weight of advice decreased as its distance from the initial opinion increased; and (d) the use of advice improved accuracy significantly, though not optimally. A theoretical framework is introduced which draws in part on insights from the study of attitude change to explain the influence of advice. Finally the usefulness of advice for improving judgment accuracy is considered.
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It is proposed that motivation may affect reasoning through reliance on a biased set of cognitive processes--that is, strategies for accessing, constructing, and evaluating beliefs. The motivation to be accurate enhances use of those beliefs and strategies that are considered most appropriate, whereas the motivation to arrive at particular conclusions enhances use of those that are considered most likely to yield the desired conclusion. There is considerable evidence that people are more likely to arrive at conclusions that they want to arrive at, but their ability to do so is constrained by their ability to construct seemingly reasonable justifications for these conclusions. These ideas can account for a wide variety of research concerned with motivated reasoning.
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135 undergraduates attributed causality for performance in a dot-estimation task to internal and external causal sources. Ss were found to attribute significantly more causality to internal sources for success outcomes than for failure outcomes, supporting a self-esteem enhancement prediction. Low-self-esteem Ss who received failure feedback attributed significantly more causality to internal causal sources than did high-self-esteem Ss, who received failure feedback, thus supporting a self-esteem consistency prediction for low-self-esteem Ss. The prediction of a positive relationship between degree of choice in engaging in the task and internal attribution of causality was not supported. A significant Self-Esteem * Perceived Performance interaction is discussed, as is an unexpected relationship between internal-external control and self-esteem.
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In a randomly determined order, each agent was given an independent, private signal about which of two states was selected by a random draw. After receiving the private signal each agent made a publicly announced decision about the state. Thus, at the time of personal decision each agent had a private signal and also knew the decisions of all preceding agents. The experiments focused on three different types of organization. (1) Agents were rewarded according to whether their announced decision was right or wrong. This “individualistic institution" is the one studied by Anderson and Holt (AER, 1997). Their discovery of information cascades is replicated. (2) Agents were rewarded according to whether a majority of announced decisions were right or wrong. Under this “majority rule institution" the instance of information cascades is sharply reduced. (3) Agents are rewarded more according to whether their personal announced decision was the same as the majority decision than they were rewarded if their decision was correct. This "conformity rewarding institution" is motivated by proceedings in which there is incentive to produce reports that conform to the reports of others. Substantial information cascades are observed.
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There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 38% per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich nonlinear patterns in the behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is further from its mean in either direction. We also show that the mean reversion in profitability produces predictable variation in earnings.
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We develop a multiperiod market model describing both the process by which traders learn about their ability and how a bias in this learning can create overconfident traders. A trader in our model initially does not know his own ability. He infers this ability from his successes and failures. In assessing his ability the trader takes too much credit for his successes. This leads him to become overconfident. A trader's expected level of overconfidence increases in the early stages of his career. Then, with more experience, he comes to better recognize his own ability. The patterns in trading volume, expected profits, price volatility, and expected prices resulting from this endogenous overconfidence are analyzed. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
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Consensus analysts' earnings per share forecasts have become increasingly accessible in recent years and such measures have been widely adopted by academics as proxies for the market's expectations of earnings. Some US studies have suggested that analysts, in revising earnings forecasts, are prone to over-reaction. This study tests for evidence of over-reaction in revisions of the consensus earnings per share forecasts of UK companies reported by the Institutional Brokers Estimate System. For a series of periods, portfolios of companies attracting high and low revisions of earnings forecasts are constructed. We then compare the subsequent earnings forecast of the companies which attracted high revisions in the portfolio formation period with those of the companies which attracted low revisions in the portfolio formation period. We also compare actual changes in annual earnings with forecast changes in annual earnings. Both analyses suggest that UK analysts are prone to under-reaction, a finding which contrasts with the US studies which have identified over-reaction. There is little evidence that the market, in reacting to earnings forecast revisions, fails to recognise this under-reaction.
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It has been alleged that firms and analysts engage in an earnings guidance game where analysts first issue optimistic earnings forecasts and then 'walk down' their estimates to a level firms can beat at the official earnings announcement. We examine whether the walk-down to beatable targets is associated with managerial incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (through option exercises and stock sales). Consistent with these hypotheses, we find that the walk-down to beatable targets is most pronounced when firms or insiders are net sellers of stock after an earnings announcement. These findings provide new insights on the impact of capital market incentives on communications between managers and analysts.
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Security regulators and the business press have alleged that firms play an 'earnings-guidance game' where analysts make optimistic forecasts at the start of the year and then 'walk down' their estimates to a level the firm can beat by the end of the year. In a comprehensive sample of I/B/E/S individual analysts' forecasts of annual earnings from 1983-1998, we find strong support for the claim in the post-1992 period. We examine whether the 'walk down' to beatable targets is associated with managers' incentives to sell stock after earnings announcements on the firm's behalf (via new equity issuance) or from their personal accounts (insider trades). Consistent with these hypotheses, we find that the 'walk down' to beatable targets is most pronounced in firms that are either net issuers of equity or in firms where managers are net sellers of stock after an earnings announcement. These findings provide new insights on how capital market incentives affect communications between managers and analysts.
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In this paper, we examine whether sell-side security analysts generate more accurate quarterly earnings forecasts and more profitable stock recommendations as their experience with a specific firm increases. We also examine whether the market relies more on forecasts made by analysts who have more firm-specific experience. Consistent with the "Learning By Doing" model, we find that the accuracy of quarterly earnings forecasts improves with the number of prior quarters the analyst has followed the firm, controlling for both the functional form of the learning phenomenon and other factors previously shown to affect analyst forecasting performance. Moreover, we find that the market incorporates the analyst's experience level in forming expected earnings; the weight placed on the analyst forecast increases with the experience level of the analyst. Our results suggest knowledge of an analyst's experience can be used to improve the accuracy of consensus earnings forecasts.
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We study equilibrium firm-level stock returns in two economies: one in which investors are loss averse over the fluctuations of their stock portfolio, and another in which they are loss averse over the fluctuations of individual stocks that they own. Both approaches can shed light on empirical phenomena, but we find the second approach to be more successful: In that economy, the typical individual stock return has a high mean and excess volatility, and there is a large value premium in the cross section which can, to some extent, be captured by a commonly used multifactor model.
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The cost of information is an often ignored factor in economic situations, even though the information acquisition behavior of the decision makers has a crucial influence on the outcome. In this experiment, we study an information aggregation process in which subjects decide in a random sequence. Subjects observe predecessors’ decisions and can acquire additional private information at a fixed price. We analyze subjects’ information acquisition behavior and updating procedures. About one half of the individuals act rationally, whereas the other participants systematically overestimate the private signal value. This leads to excessive signal acquisitions and reduced conformity.
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This paper presents a model in which a representative investor has only a noisy signal of the reliability of his information. This noise causes prices to underreact to reliable information and overreact to unreliable information. We call this phenomenon `moderated confidence', because in both cases, the investor's confidence is moderated toward his prior expectation of reliability. Although moderated confidence can be consistent with rationality, we construct a laboratory setting in which it is not. Still, we find strong support for both types of price errors. We also find that tests of weak-form efficiency can indicate overreactions, even when tests of semi-strong-form efficiency indicate underreactions using exactly the same data. These results can help empirical researchers develop specific alternative hypotheses to market efficiency, by helping them predict ex ante whether a given research study is likely to reveal over- or underreactions.
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In this study of sell-side analysts’ forecasts, we explore the effects of analyst aptitude, learning-by-doing, and the internal environment of the brokerage house on forecast accuracy. Our results indicate that analysts’ aptitude and brokerage house characteristics are associated with forecast accuracy, while learning-by-doing is only associated with forecast accuracy when we do not control for analysts’ company-specific aptitude in forecasting. It is unlikely that this result is caused by measurement errors because it is robust when we use a sub-sample where we can accurately measure experience.
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The extensive literature that investigates whether analysts’ earnings forecasts are biased and/or inefficient has produced conflicting evidence and no definitive answers to either question. This paper shows how two relatively small but statistically influential asymmetries in the tail and the middle of distributions of analysts’ forecast errors can exaggerate or obscure evidence consistent with analyst bias and inefficiency, leading to inconsistent inferences. We identify an empirical link between firms’ recognition of unexpected accruals and the presence of the two asymmetries in distributions of forecast errors that suggests that firm reporting choices play an important role in determining analysts’ forecast errors.
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We argue that if analysts’ objective is to provide the most accurate forecast by minimizing the mean absolute forecast error, then the optimal forecast is the median instead of the mean earnings. Forecast bias is observed when the median is different from the mean in a skewed earnings distribution. Thus, part of the observed analyst forecast bias could be a result of analysts’ efforts to improve forecast accuracy when the earnings distribution is skewed. We find that earnings skewness is significantly related to analyst forecast bias. We also provide evidence that the market adjusts for part of the skewness-induced bias.
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Recently, the theory of informational cascades has been tested in an experiment by L. Anderson and Ch. Holt (American Economic Review, 87 (1997) 847–862) who report that their data support the theory amazingly well. In this paper we report on an experiment designed to find out whether observed cascades are indeed due to rational Bayesian updating. However, we find little support for rational updating. The simple heuristic “follow your own signal” does much better in explaining our data than Bayesian rationality.
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Prior studies have identified systematic and time persistent differences in analysts’ earnings forecast accuracy, but have not explained why the differences exist. Using the I/B/E/S Detail History database, this study finds that forecast accuracy is positively associated with analysts’ experience (a surrogate for analyst ability and skill) and employer size (a surrogate for resources available), and negatively associated with the number of firms and industries followed by the analyst (measures of task complexity). The results suggest that analysts’ characteristics may be useful in predicting differences in forecasting performance, and that market expectations studies may be improved by modeling these characteristics.
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Theoretical models predict that overconfident investors trade excessively. We test this prediction by partitioning investors on gender. Psychological research demonstrates that, in areas such as finance, men are more overconfident than women. Thus, theory predicts that men will trade more excessively than women. Using account data for over 35,000 households from a large discount brokerage, we analyze the common stock investments of men and women from February 1991 through January 1997. We document that men trade 45 percent more than women. Trading reduces men's net returns by 2.65 percentage points a year as opposed to 1.72 percentage points for women. © 2000 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
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Several theories of reputation and herd behavior (e.g., Scharfstein and Stein (1990) and Zweibel (1995)) suggest that herding among agents should vary with career concerns. Our goal is to document whether such a link exists in the labor market for security analysts. We find that inexperienced analysts are more likely to be terminated for inaccurate earnings forecasts than are their more experienced counterparts. Controlling for forecast accuracy, they are also more likely to be terminated for bold forecasts that deviate from the consensus. Consistent with these implicit incentives, we find that inexperienced analysts deviate less from consensus forecasts. Additionally, inexperienced analysts are less likely to issue timely forecasts, and they revise their forecasts more frequently. These findings are broadly consistent with existing career concern motivated herding theories.
Article
Many studies have reported that the confidence people have in their judgments exceeds their accuracy and that overconfidence increases with the difficulty of the task. However, some common analyses confound systematic psychological effects with statistical effects that are inevitable if judgments are imperfect. We present three experiments using new methods to separate systematic effects from the statistically inevitable. We still find systematic differences between confidence and accuracy, including an overall bias toward overconfidence. However, these effects vary greatly with the type of judgment. There is little general overconfidence with two-choice questions and pronounced overconfidence with subjective confidence intervals. Over- and underconfidence also vary systematically with the domain of questions asked, but not as a function of difficulty. We also find stable individual differences. Determining why some people, some domains, and some types of judgments are more prone to overconfidence will be important to understanding how confidence judgments are made. Copyright 1999 Academic Press.
Article
People received advice from four sources and used it to produce a judgment. They also assessed the quality of advice by estimating the probability that it would be correct. They were better at assessing than at using advice: combinations of advice based on their assessments were superior to their judgments. Order of assessing and using advice, superficial differences between advisors, and using other methods of advice assessment had no significant effects on this superiority of advice assessment over advice use. However, use but not assessment was improved when some advisors exhibited biases opposite to those that people typically show. It appears that using advice imposes a heavier processing load than assessing its quality and that this load can be lightened by including advisors who exhibit unusual behavior. Their salience may help people working under a heavy processing load make appropriate pairings between advisor weights and advice. Copyright 2000 Academic Press.
Article
We develop a multiperiod market model describing both the process by which traders learn about their ability and how a bias in this learning can create overconfident traders. A trader in our model initially does not know his own ability. He infers this ability from his successes and failures. In assessing his ability the trader takes too much credit for his successes. This leads him to become overconfident. A trader's expected level of overconfidence increases in the early stages of his career. Then, with more experience, he comes to better recognize his own ability. The patterns in trading volume, expected profits, price volatility, and expected prices resulting from this endogenous overconfidence are analyzed. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.
Article
A rational analysis of analyst behavior predicts that analysts immediately and without bias incorporate information into their forecasts. Several studies document analysts' tendency to systematically underreact to information. Underreaction is inconsistent with rationality. Other studies indicate that analysts systematically overreact to new information or that they are systematically optimistic. This study discriminates between these three hypotheses by examining the interaction between the nature of information and the type of reaction by analysts. The evidence indicates that analysts underreact to negative information, but overreact to positive information. These results are consistent with systematic optimism in response to information. Copyright The American Finance Association 1999.
Article
We propose a theory of securities market under- and overreactions based on two well-known psychological biases: investor overconfidence about the precision of private information; and biased self-attribution, which causes asymmetric shifts in investors' confidence as a function of their investment outcomes. We show that overconfidence implies negative long-lag autocorrelations, excess volatility, and, when managerial actions are correlated with stock mispricing, public-event-based return predictability. Biased self-attribution adds positive short-lag autocorrelations ("momentum"), short-run earnings "drift," but negative correlation between future returns and long-term past stock market and accounting performance. The theory also offers several untested implications and implications for corporate financial policy. Copyright The American Finance Association 1998.
Biased forecasts or biased earn-ings? The role of earnings management in explaining appar-ent optimism and inefficiency in analysts’ earnings forecasts
  • J S Abarbanell
  • R Lehavy
Abarbanell, J. S., R. Lehavy. 2003. Biased forecasts or biased earn-ings? The role of earnings management in explaining appar-ent optimism and inefficiency in analysts’ earnings forecasts. J. Accounting Econom. 36(1–3) 105–146
The Calibration of Expert Judgment: Heuristics and Biases Beyond the Laboratory”, Heuristics and Biases Human Decision ProcessesAttribution Determinants of Achievement-Related Behavior
  • Koehler
  • J Derek
  • Lyle
  • Dale Brenner
  • Griffin
Koehler, Derek J., Lyle Brenner and Dale Griffin, “The Calibration of Expert Judgment: Heuristics and Biases Beyond the Laboratory”, Heuristics and Biases, edited by Thomas Gilovich, Dale Griffin and Daniel Kahneman, Cambridge University Press, 2002. Human Decision Processes, Vol. 81, r23 Kukla, Andy, “Attribution Determinants of Achievement-Related Behavior”, Journal of Personality and Social Psychology, Vol. 21, 1972, pp. 197-207
Effect of Self-Esteem, Perceived Performance, Choice on Causal AttributionsAnalysts' Decisions as Products of a Multi-Task Environment
  • Gordon Fitch
  • Fiske
  • Shelley E Susan
  • Taylor
Fitch, Gordon, “Effect of Self-Esteem, Perceived Performance, Choice on Causal Attributions”, Journal of Personality and Social Psychology, Vol. 16, 1970, pp. 311-315. r22 Fiske, Susan and Shelley E. Taylor, Social Cognition, 1991, McGraw & Hill, New York, Francis, Jennifer and Donna Philbrick, “Analysts' Decisions as Products of a Multi-Task Environment”, Journal of Accounting Research, Vol. 31, 1993, pp. 216-230
Social Cognition rHilary and Menzly: Does Past Success Lead Analysts to Become Overconfident? Effect of self-esteem, perceived performance, choice on causal attributions
  • S Fiske
  • S E Taylor
Fiske, S., S. E. Taylor. 1991. Social Cognition. McGraw Hill, New York. rHilary and Menzly: Does Past Success Lead Analysts to Become Overconfident? Management Science 52(4), pp. 489–500, ©2006 INFORMS 500 Fitch, G. 1970. Effect of self-esteem, perceived performance, choice on causal attributions. J. Personality Soc. Psych. 16 311–315
Inefficiency in Analysts' Earnings Forecasts
  • John C Easterwood
  • R Stacey
  • Nutt
Easterwood, John C. and Stacey R. Nutt, "Inefficiency in Analysts' Earnings Forecasts;
Systematic Misreaction or Systematic Optimism
Systematic Misreaction or Systematic Optimism," Journal of Finance, October 1999, pp. 1777- 1797.
  • Richard P Larrick
  • Jack B Soll
Larrick, Richard P. and Jack B. Soll, " Strategies for Revising Judgement ", Working Paper, 2004.
  • Susan Fiske
  • Shelley E Taylor
Fiske, Susan and Shelley E. Taylor, Social Cognition, 1991, McGraw & Hill, New York,