Behavioral Bias in Number Processing: Evidence from Analysts' Expectations

41 Pages Posted: 6 Oct 2015 Last revised: 24 Jul 2019

See all articles by Tristan Roger

Tristan Roger

Université Paris-Dauphine, PSL Research University

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School

Alain Schatt

University of Lausanne, HEC-Lausanne

Date Written: March 2, 2018

Abstract

Research in neuropsychology shows that individuals process small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we show that financial analysts process small prices and large prices differently. When they are optimistic (pessimistic), analysts issue more optimistic (pessimistic) target prices for small price stocks than for large price stocks. Our results are robust when controlling for the usual risk factors such as size, book-to-market, momentum, profitability and investments. They are also robust when we control for firm and analyst characteristics, or for other biases such as the 52-week high bias, the preference for lottery-type stocks and positive skewness, and the analyst tendency to round numbers. Finally, we show that analysts become more optimistic after stock splits. Overall, our results suggest that a deeply-rooted behavioral bias in number processing drives analysts' return expectations.

Keywords: Financial analysts, target prices, behavioral biases, number perception

Suggested Citation

Roger, Tristan and Roger, Patrick and Schatt, Alain, Behavioral Bias in Number Processing: Evidence from Analysts' Expectations (March 2, 2018). Journal of Economic Behavior and Organization, Vol. 149, May 2018. Available at SSRN: https://ssrn.com/abstract=2669451 or http://dx.doi.org/10.2139/ssrn.2669451

Tristan Roger (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
cedex 16
Paris, 75775
France

Patrick Roger

Strasbourg University - LARGE Research Center - EM Strasbourg Business School ( email )

PEGE
61 avenue de la Forêt Noire
Strasbourg, 67000
France

Alain Schatt

University of Lausanne, HEC-Lausanne ( email )

Unil Dorigny, Batiment Internef
Lausanne, 1015
Switzerland

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