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Financial Analysts and the False Consensus Effect


  • Accepted by Haresh Sapra. I thank Laura Field, Dave Haushalter, Michelle Lowry, Annette Vissing-Jørgensen, and an anonymous referee for their helpful comments and suggestions. I have also benefited from conversations and feedback from Snehal Banerjee, Nick Barberis, Orie Barron, Sudipta Basu, Larry Brown, Fritz Burkhardt, Joey Engelberg, Grant Farnsworth, Paul Fischer, Mike Fishman, Paul Gao, Dan Givoly, Zhiguo He, Andrew Hertzberg, Steve Huddart, Peter Iliev, Jiro Kondo, Cami Kuhnen, Henock Louis, Mitchell Petersen, Jeff Pontiff, Paola Sapienza, Phil Shane, Joel Vanden, Raisa Velthuis, Svetla Vitanova, Beverly Walther, Adam Welker, and seminar participants at the 2011 Penn State Accounting Conference. All errors are mine.


Social psychologists have documented a tendency for people to overestimate their similarity to others. I investigate whether financial analysts' forecast errors are consistent with this bias. I model the bias by assuming analysts overestimate the correlation of the private signals they receive about a firm's future earnings. My model predicts a positive relationship between (i) the likelihood of an analyst's revised forecast being too close to his earlier forecast and (ii) the number of analysts issuing forecasts during the time interval between his two forecasts. I empirically confirm this prediction and consider several alternative explanations.