When they are wrong about quarterly earnings forecasts, analysts may stubbornly stick to their erroneous views, a tendency that might contribute to market bubbles and busts, according to research coauthored by John Beshears of the Stanford Graduate School of Business.
People become overcommitted to a previous course of action. Psychological factors like this play an important role in how people form expectations about the future.
Among the specific findings:
- As analysts got more and more extreme, or “out-of-consensus,” they became less and less responsive to the new earnings information when revising their full-year forecasts.
- Stubbornness hurts forecasting accuracy. Revised full-year forecasts from extreme incorrect analysts were further off the mark from actual earnings than they would have been had the analysts’ updating behavior been like the behavior of analysts who started at the consensus point.
- Analysts are punished for stubbornness. The more extreme, incorrect, and stubborn an analyst was, the less likely that he or she would rank among Institutional Investor magazine’s “All-American” list of top analysts.