Do Teams Alleviate or Exacerbate Overreaction in Beliefs?

129 Pages Posted: 11 Feb 2021 Last revised: 28 Jan 2025

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

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

Vincenzo Pezone

Tilburg University - Department of Finance

Date Written: February 10, 2021

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

Suggested Citation

Barahona, Ricardo and Cassella, Stefano and Jansen, Kristy A.E. and Pezone, Vincenzo,

Do Teams Alleviate or Exacerbate Overreaction in Beliefs?

(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)

University of Southern California - Marshall School of Business ( email )

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vincenzo Pezone

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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