Confirmation Bias in Analysts’ Response to Consensus Forecasts

Abstract

This paper provides evidence of confirmation bias by sell-side analysts in their earnings forecasts. We show that analysts tend to put higher weight on public information when the current forecast consensus is more consistent with their previous forecasts. We further find that analysts with better past forecasting performance, longer experience, forecasting earlier, or facing less dispersion in peer forecasts, tend to be more subject to confirmation bias, consistent with some of the existing cognitive and social psychology theories. Our findings show that analysts’ confirmation bias is more pervasive than that documented in existing studies. The results remain significant after controlling for analyst incentives, and are distinct from the effects of conservatism, self-attribution, and overconfidence.

Keywords: Confirmation Bias, Analyst Earnings Forecasts, Weighting Inefficiency, Behavioral Finance.

JEL Classification: G24, G41