Tuesday, April 17, 2012

EVGENIOU Theodoros, FANG Lily Hua, HOGARTH Robin M., KARELAIA Natalia
Competitive Dynamics in Forecasting: The Interaction of Skill and Uncertainty
INSEAD Working Paper 2012/44/DS/FIN

The outcomes of many activities depend upon both skill and luck. We analyze stock analysts’ forecasts of companies’ earnings per share under market conditions that vary in volatility and thus imply different levels of luck in outcomes. Noting that making forecasts that deviate widely from the consensus—which is observable by the analyst—potentially carries both career-related rewards but also reputational risks, we examine the degree of deviation from consensus exhibited by analysts of different skill levels (measured by both past forecasting accuracy and education) in different market conditions. We find that average deviations from consensus increase as markets become more volatile. At the same time, low-skill analysts exhibit larger increases in deviations from consensus than high-skill analysts. We suggest possible interpretations for these findings and directions for future research.