Contrast Effects: The Phantom of The Latest Forecasts

67 Pages Posted: 19 Sep 2022 Last revised: 17 Apr 2023

See all articles by Huan Cai

Huan Cai

Cornell College

Xiaodi Zhang

Shanghai University of Finance and Economics

Jie Zheng

Tsinghua University - School of Economics & Management

Date Written: April 15, 2023


Psychology research on contrast effects suggests that the information from a previous decision may be compared to the information provided for the current judgement task. We document a new stylized fact that an analyst’s current earnings forecast of one firm tends to bias against her latest forecast revision of another firm. Such evidence of contrast effects is further supported by another finding that the current forecast tends to be less accurate when the discrepancy between the current revision and the latest revision is larger. In addition, consistent with previous findings in the psychology literature, the contrast effects are stronger when the two successive forecasts are closer in forecasting time or when the two forecasted firms share more related cues (e.g., from the same industry). Furthermore, the contrast effects are weaker only for analysts with specific types of experiences, such as those who have been exposed to more variation in historical forecast revisions or those who follow firms in more industries. However, more years of forecasting experience in general does not reduce but rather accentuate contrast effects, consistent with the fresh thinker hypothesis. We also test stock market reaction and show that investors discount for contrast effects. Finally, additional robustness tests confirm that our results cannot be explained by alternative effects documented in the prior literature.

Keywords: Contrast Effects, Analysts, Earnings Forecasts, Cognitive Biases, Behavioral Finance.

JEL Classification: G02, G14, G24, G41

Suggested Citation

Cai, Huan and Zhang, Xiaodi and Zheng, Jie, Contrast Effects: The Phantom of The Latest Forecasts (April 15, 2023). Available at SSRN: or

Huan Cai

Cornell College ( email )

United States

Xiaodi Zhang

Shanghai University of Finance and Economics ( email )

School of Finance

Jie Zheng (Contact Author)

Tsinghua University - School of Economics & Management ( email )

Beijing, 100084


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