Are Analysts' Loss Functions Asymmetric?

Journal of Forecasting, November 2011

Posted: 16 Jan 2006 Last revised: 4 Jun 2012

See all articles by Mark Clatworthy

Mark Clatworthy

University of Bristol, Department of Accounting and Finance

David A. Peel

Lancaster University - Management School

Peter F. Pope

Bocconi University; London School of Economics

Date Written: April 7, 2011


Despite displaying a statistically significant optimism bias, analysts’ earnings forecasts are an important input to investors’ valuation models. Understanding the possible reasons for any bias is important if information is to be extracted from earnings forecasts and used optimally by investors. Extant research into the shape of analysts’ loss functions explains optimism bias as resulting from analysts minimizing the mean absolute forecast error under symmetric, linear loss functions. When the distribution of earnings outcomes is skewed, optimal forecasts can appear biased. In contrast, research into analysts’ economic incentives suggests that positive and negative earnings forecast errors made by analysts are not penalized or rewarded symmetrically, suggesting that asymmetric loss functions are an appropriate characterization. To reconcile these findings, we exploit results from economic theory relating to the Linex loss function to discriminate between the symmetric linear loss and the asymmetric loss explanations of analyst forecast bias. Under asymmetric loss functions optimal forecasts will appear biased even if earnings outcomes are symmetric. Our empirical results support the asymmetric loss function explanation. Further analysis also reveals that forecast bias varies systematically across firm characteristics that capture systematic variation in the earnings forecast error distribution.

Keywords: asymmetric loss functions, earnings forecast bias, financial analysts, Linex

JEL Classification: G10, G29, D84, M41, M43

Suggested Citation

Clatworthy, Mark A. and Peel, David Alan and Pope, Peter F., Are Analysts' Loss Functions Asymmetric? (April 7, 2011). Journal of Forecasting, November 2011. Available at SSRN: or

Mark A. Clatworthy

University of Bristol, Department of Accounting and Finance ( email )

School of Economics, Finance and Management
8 Woodland Road
Bristol, BS8 1TN
United Kingdom
+44(0)1173310914 (Phone)

David Alan Peel

Lancaster University - Management School ( email )

Lancaster, LA1 4YX
United Kingdom
+44 (0)1524 593590 (Phone)
+44 (0)1524 594244 (Fax)


Peter F. Pope (Contact Author)

Bocconi University ( email )


London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics