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Individual risk tolerance and herding behaviors in financial forecasts
Author(s) -
Christoffersen Jeppe,
Stæhr Simone
Publication year - 2019
Publication title -
european financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.311
H-Index - 64
eISSN - 1468-036X
pISSN - 1354-7798
DOI - 10.1111/eufm.12231
Subject(s) - herding , boldness , herd behavior , earnings , explanatory power , set (abstract data type) , rational expectations , economics , financial market , financial economics , econometrics , psychology , finance , social psychology , computer science , personality , philosophy , epistemology , forestry , programming language , geography
Financial analysts tend to demonstrate herding behavior, which sometimes compromises accuracy. A number of explanations spanning rational economic logic, cognitive biases, and social forces have been suggested. Relying on an experimental setting where participants forecast future earnings from a rich information set, we posit and obtain support for individual risk tolerance (or lack thereof) as an explanatory variable for herding behaviors. Specifically, less risk‐tolerant individuals forecast with less boldness and instead issue forecasts in agreement with the consensus forecast. The results are argued to be at least partially a product of cognitive biases and an intuitive reaction to uncertainty.