Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market?

Abstract

We investigate how teams impact return extrapolation, a bias in belief formation which is pervasive at the individual level and crucial to behavioral asset-pricing models. Using a sample of US equity money managers and a within-subject design, we find that teams attenuate their own members’ extrapolation bias by 75%. This reduction is not due to learning or differences in compensation, workload, or investment objectives between solo-managed and team-managed funds. Rather, we provide supportive evidence that team members engaging in deeper cognitive reflection can explain the bias reduction.

Keywords: Expectation Formation, Extrapolation, Heuristics, Teams

JEL Classification: G23, G41, D91