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

109 Pages Posted: 11 Feb 2021 Last revised: 22 Jul 2023

See all articles by Ricardo Barahona

Ricardo Barahona

Banco de España; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Stefano Cassella

Tilburg University- School of Economics and Management

Kristy A.E. Jansen

Marshall School of Business - University of Southern California; De Nederlandsche Bank

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Date Written: February 10, 2021

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

Suggested Citation

Barahona, Ricardo and Cassella, Stefano and Jansen, Kristy A.E., Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market? (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783421 or http://dx.doi.org/10.2139/ssrn.3783421

Ricardo Barahona

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

Burgemeester Oudlaan 50
Rotterdam, 3062PA
Netherlands

Stefano Cassella

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Kristy A.E. Jansen (Contact Author)

Marshall School of Business - University of Southern California

701 Exposition Blvd
Los Angeles, CA 90089
United States

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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