Financial analysts and stock market investors alike are subject to behavioral biases. Objective analyst forecasts can potentially help correct investor misperceptions. On the other hand, biased forecasts can reinforce or incite investor misperceptions. Furthermore, data on analyst behavior provide a rich window of insight into the nature of psychological bias among an important and incentivized group of professionals, since ex post information is available about the accuracy of analyst forecasts under different conditions. Analyst behavior also provides insights into the sources of stock market mispricing.
As a possible example of analyst psychological bias, consider decision fatigue, defined as the tendency for decision quality to decline after an extensive session of decision-making. Whether decision fatigue exists has been a topic of controversy as part of the greater replication crisis in experimental psychology. My collaborators Yaron Levi, Ben Lourie, Siew Hong Teoh, and I provide a test of whether decision fatigue affects a set of skilled financial professionals in the field. Specifically, we test whether decision fatigue causes stock market analysts to be more heuristic in their forecasting.