John OBrien’s scientific contributions

A large body of literature has rejected rational expectations in relation to analyst forecasts. In this paper we start with a boundedly rational premise that analysts and managers adopt are influenced by the availability heuristic (Tversky and Kahneman [1973]24. Tversky , A. and Kahneman , D. 1973. “Availability: A Heuristic for Judging Frequency and Probability.”. Cognitive Psychology, 5: 207–232. [CrossRef], [Web of Science ®]View all references). In the presence of business cycles, a rational growth forecast presupposes precise knowledge of the factors that cause a business cycle. In contrast, under the availability heuristic the current state is overweighted in the growth forecast and so whatever part of the business cycle the economy is currently in will be preserved by the investment decision. As a result, under the hypothesis of the availability heuristic we will observe ex-post, a systematic association between the drivers of this behavior (e.g., current state of the economy, industry, current performance) and subsequent forecast errors and (realized) growth when related to specific properties of the business cycle. We test for this condition and find evidence in support of it. The boundedly rational premise also provides a prediction for the nature of information that can improve analyst forecasts. The results from our analysis provide support for conclusion that a major driver of the boundedly rational behavior is ignoring the business cycle. Together these results provide direct evidence in support of Sargent's [2001]18. Sargent , T. 2001. Bounded Rationality in Macroeconomics, Oxford: Oxford University Press. Reprinted version View all references conjecture that a plausible reason for departures from rational expectations is the overly strong assumptions regarding the knowledge the agents are assumed to possess regarding the underlying laws of motion for the economy.