Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions
Earnings forecasts by financial analysts are critical to guiding investment decisions and corporate valuations. This study examines how forecast sequence (disaggregation vs. aggregation) interacts with initial optimism (presence vs. absence) to shape the accuracy of earnings predictions. A 2×2 betwe...
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| Format: | Article |
| Language: | English |
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LLC "CPC "Business Perspectives"
2025-03-01
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| Series: | Investment Management & Financial Innovations |
| Subjects: | |
| Online Access: | https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/21694/IMFI_2025_01_Gong.pdf |
| _version_ | 1826553977353797632 |
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| author | Yuki Gong Hideyuki Hao Sun Sing Lui So Zehua Chen Ruixue Sun |
| author_facet | Yuki Gong Hideyuki Hao Sun Sing Lui So Zehua Chen Ruixue Sun |
| author_sort | Yuki Gong |
| collection | DOAJ |
| description | Earnings forecasts by financial analysts are critical to guiding investment decisions and corporate valuations. This study examines how forecast sequence (disaggregation vs. aggregation) interacts with initial optimism (presence vs. absence) to shape the accuracy of earnings predictions. A 2×2 between-subjects experimental design was employed, involving 97 professional financial analysts from leading U.S.-based brokerage firms with extensive experience in equity research. These analysts, representative of the target population making critical market forecasts, were tasked with predicting the annual earnings per share (EPS) of a hypothetical global hospitality firm, Firm X, listed on the New York Stock Exchange. The sample was chosen to ensure high external validity by mirroring real-world practices and decision contexts in financial forecasting. Initial optimism was manipulated using “strong-buy” and “neutral” stock recommendations, while forecast sequence was adjusted by requiring updates either after each management announcement (disaggregation) or collectively (aggregation). Results demonstrate that disaggregation amplifies optimistic bias in the presence of initial optimism, resulting in inflated earnings forecasts. This effect is attributed to confirmation bias. In contrast, no significant differences in forecasts were observed between sequences in the absence of initial optimism. These findings offer practical insights into mitigating cognitive biases in financial analysis, emphasizing the dual-edged role of disaggregation. Future research may extend these findings across diverse industries and forecasting contexts to further refine strategies for enhancing decision-making accuracy and investor trust. |
| first_indexed | 2025-03-14T07:33:35Z |
| format | Article |
| id | doaj.art-65aa84779bd848e5bf6dadd1408263b8 |
| institution | Directory Open Access Journal |
| issn | 1810-4967 1812-9358 |
| language | English |
| last_indexed | 2025-03-14T07:33:35Z |
| publishDate | 2025-03-01 |
| publisher | LLC "CPC "Business Perspectives" |
| record_format | Article |
| series | Investment Management & Financial Innovations |
| spelling | doaj.art-65aa84779bd848e5bf6dadd1408263b82025-03-03T09:20:05ZengLLC "CPC "Business Perspectives"Investment Management & Financial Innovations1810-49671812-93582025-03-0122132433810.21511/imfi.22(1).2025.2521694Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictionsYuki Gong0https://orcid.org/0009-0001-3598-4789Hideyuki Hao Sun1https://orcid.org/0009-0006-6830-6040Sing Lui So2https://orcid.org/0009-0009-7020-2189Zehua Chen3https://orcid.org/0009-0005-7309-8883Ruixue Sun4https://orcid.org/0009-0005-7930-5580Postgraduate Student, College of Computing, Georgia Institute of Technology, USAPostgraduate Student, College of Computing, Georgia Institute of Technology, USAPostgraduate Student, College of Computing, Georgia Institute of Technology, USAAudit Intern at Klynveld Peat Marwick Goerdeler (KPMG), Hong Kong SARAnalyst at Global Law Office, ChinaEarnings forecasts by financial analysts are critical to guiding investment decisions and corporate valuations. This study examines how forecast sequence (disaggregation vs. aggregation) interacts with initial optimism (presence vs. absence) to shape the accuracy of earnings predictions. A 2×2 between-subjects experimental design was employed, involving 97 professional financial analysts from leading U.S.-based brokerage firms with extensive experience in equity research. These analysts, representative of the target population making critical market forecasts, were tasked with predicting the annual earnings per share (EPS) of a hypothetical global hospitality firm, Firm X, listed on the New York Stock Exchange. The sample was chosen to ensure high external validity by mirroring real-world practices and decision contexts in financial forecasting. Initial optimism was manipulated using “strong-buy” and “neutral” stock recommendations, while forecast sequence was adjusted by requiring updates either after each management announcement (disaggregation) or collectively (aggregation). Results demonstrate that disaggregation amplifies optimistic bias in the presence of initial optimism, resulting in inflated earnings forecasts. This effect is attributed to confirmation bias. In contrast, no significant differences in forecasts were observed between sequences in the absence of initial optimism. These findings offer practical insights into mitigating cognitive biases in financial analysis, emphasizing the dual-edged role of disaggregation. Future research may extend these findings across diverse industries and forecasting contexts to further refine strategies for enhancing decision-making accuracy and investor trust.https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/21694/IMFI_2025_01_Gong.pdfanalyst forecastingbehavioral financecognitive biasesconfirmation biasdisaggregated forecastingearnings predictions |
| spellingShingle | Yuki Gong Hideyuki Hao Sun Sing Lui So Zehua Chen Ruixue Sun Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions Investment Management & Financial Innovations analyst forecasting behavioral finance cognitive biases confirmation bias disaggregated forecasting earnings predictions |
| title | Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions |
| title_full | Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions |
| title_fullStr | Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions |
| title_full_unstemmed | Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions |
| title_short | Unpacking analyst forecast bias: The role of optimism and sequence in shaping earnings predictions |
| title_sort | unpacking analyst forecast bias the role of optimism and sequence in shaping earnings predictions |
| topic | analyst forecasting behavioral finance cognitive biases confirmation bias disaggregated forecasting earnings predictions |
| url | https://www.businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/21694/IMFI_2025_01_Gong.pdf |
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