Uncertainty, Skill, and Analysts' Dynamic Forecasting Behavior

36 Pages Posted: 9 Jul 2010

See all articles by Theodoros Evgeniou

Theodoros Evgeniou

INSEAD

Lily H. Fang

INSEAD - Finance

Robin M. Hogarth

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences

Natalia Karelaia

INSEAD - Decision Sciences

Date Written: July 9, 2010

Abstract

We study the risk-taking behavior of stock analysts under varying market conditions. We examine how the risk analysts take by providing bold forecasts that deviate from consensus depends on the degree of uncertainty in the environment as well as the analysts’ skill level. We provide evidence that low-skill analysts become significantly bolder, hence taking more risk, and significantly less accurate when market uncertainty increases. These findings are consistent with previous experimental results that show that skill levels moderate differential attitudes towards uncertainty. We further provide evidence that the difference in an analyst’s boldness between times of low and high uncertainty is a signal of the analyst’s skill that predicts future forecasting accuracy over and above standard skill measures such as past forecasting accuracy.

Keywords: Risk Taking, Skill, Chance, Uncertainty, Financial Analysts, Earning Forecasts

Suggested Citation

Evgeniou, Theodoros and Fang, Lily H. and Hogarth, Robin M. and Karelaia, Natalia, Uncertainty, Skill, and Analysts' Dynamic Forecasting Behavior (July 9, 2010). INSEAD Working Paper No. 2010/50/DS/FIN, Available at SSRN: https://ssrn.com/abstract=1636634 or http://dx.doi.org/10.2139/ssrn.1636634

Theodoros Evgeniou (Contact Author)

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Lily H. Fang

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Robin M. Hogarth

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
34 93 542 2561 (Phone)
34 93 542 1746 (Fax)

Natalia Karelaia

INSEAD - Decision Sciences ( email )

United States

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