Individual Risk Tolerance and Herding Behaviors in Financial Forecasts

Jeppe Christoffersen, Simone Stæhr

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

Financial analysts tend to demonstrate herding behaviour, 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 behaviours. 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.
Original languageEnglish
JournalEuropean Financial Management
Volume25
Issue number5
Pages (from-to)1348-1377
Number of pages30
ISSN1354-7798
DOIs
Publication statusPublished - Nov 2019

Bibliographical note

Published online: 25. May 2019

Keywords

  • Boldness
  • Cognitive bias
  • Intuition
  • News asymmetry
  • Experiment

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