Competitive Dynamics in Forecasting: The Interaction of Skill and Uncertainty

Journal of Behavioral Decision Making 26 (4), 375-384, 2013

34 Pages Posted: 5 Oct 2014

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: 2013

Abstract

The outcomes of many activities depend upon both skill and luck. We analyze stock analysts’ forecasts of companies’ earnings per share under market conditions that vary in volatility and thus imply different levels of luck in outcomes. Noting that making forecasts that deviate widely from the consensus of their peers — which is observable by the analyst — potentially carries both career-related rewards but also reputational risks, we examine the degree of deviation from consensus exhibited by analysts of different skill levels (measured by both past forecasting accuracy and education) in different market conditions. We find that average deviations from consensus increase as markets become more volatile. At the same time, low-skill analysts exhibit larger increases in deviations from consensus than high-skill analysts. We suggest possible interpretations for these findings and directions for future research.

Keywords: Risk taking, skill, chance, uncertainty, contests, financial analysts, earnings forecasts

JEL Classification: G20

Suggested Citation

Evgeniou, Theodoros and Fang, Lily H. and Hogarth, Robin M. and Karelaia, Natalia, Competitive Dynamics in Forecasting: The Interaction of Skill and Uncertainty (2013). Journal of Behavioral Decision Making 26 (4), 375-384, 2013, Available at SSRN: https://ssrn.com/abstract=2505219

Theodoros Evgeniou

INSEAD ( email )

Boulevard de Constance
77305 Fontainebleau Cedex
France

Lily H. Fang (Contact Author)

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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