Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market?
109 Pages Posted: 11 Feb 2021 Last revised: 22 Jul 2023
Date Written: February 10, 2021
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: Suggested Citation