Forecasters Herd For Reputational Reasons

Abstract

A sizeable literature reports that financial market analysts and forecasters herd for reputational reasons. Using new data from a large survey of professional forecasters’ expectations about stock market movements, we find strong evidence that the expected average of all forecasters’ forecasts (the expected consensus forecast) influences an individual forecaster’s own forecast. This looks like herding. In our survey, forecasters do not herd for reputational reasons, however. Instead of herding, we suggest that forecasters form higher-order expectations in the spirit of Keynes (1936). We find that young forecasters and portfolio managers, who in previous studies have been reported to be those who in particular herd, rely more on the expected consensus forecasts than other forecasters. Given that forecasters have no incentive to herd in our study, we conclude that our results indicate that the incorporation of the expected consensus forecast into individual forecasts is most likely due to higher-order expectations.

Excerpts

Our rst result is that forecasters are infuenced by the expected consensus forecast. This basic result is highly statistically signi cant, remains signi cant when adding di fferent kinds of control variables, shows up in all our robustness tests, and, most importantly, is also of substantial economic significance. Finding that forecasters are influenced by the consensus forecast in this dataset of German forecasters both con rms ndings from the U.S. to other countries, and, at the same time, thereby provideout-of-sample”evidence on the results from the U.S. studies, as reported in, e.g., Graham (1999), Welch (2000), and Lamont (2002). We nd that young forecasters and portfolio managers, who in previous studies have been reported to be those who in particular herd, rely more on the expected consensus forecasts than other forecasters. Given that forecasters have no incentive to herd in our study, we conclude that our results indicate that the incorporation of the expected consensus forecast into individual forecasts is most likely due to higher-order expectations.

Do Individuals Adjust to Consensus Beliefs?

We have shown that forecasters take into account the expected average of individual forecasts. This is a necessary condition for higher-order expectations. Another way to illustrate that investor really adapt to the consensus expectation is to evaluate whether those forecaster’s whose forecast was far away” from the consensus forecast last period adapt more to the consensus than do those forecasters whose forecast was not that far away from the consensus. To do this, we run regressions of individual expectations on the di erence between lagged individual expectations and consensus beliefs.

Click Here To Read: Forecasters Herd For Reputational Reasons

About Miguel Barbosa

I run this site.

12. November 2009 by Miguel Barbosa
Categories: Behavioral Economics, Curated Readings | Leave a comment

Leave a Reply

Required fields are marked *