Do Teams Alleviate or Exacerbate Overreaction in Beliefs?

Abstract

We investigate whether teams exhibit increased or reduced overreaction in expectation formation relative to individuals in a financial context. A field analysis of money managers operating both individually and as part of a team shows that teams attenuate their members’ overreaction to the recent performance of an investment. In preregistered randomized experiments where expectations about future returns are elicited directly, we find consistent evidence of lower overreaction in teams. A quantitative decomposition of this team effect shows that the reduced overreaction stems from a “self-selection” mechanism, whereby the most biased team members choose to influence the team decision less.

Keywords: Expectation Formation, Extrapolation, Teams, Lab Experiment, Behavioral Finance, Performance

JEL Classification: G23, G41, D91