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Individual risk tolerance and herding behaviors in financial forecasts

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  • Jeppe Christoffersen
  • Simone Stæhr

Abstract

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.

Suggested Citation

  • Jeppe Christoffersen & Simone Stæhr, 2019. "Individual risk tolerance and herding behaviors in financial forecasts," European Financial Management, European Financial Management Association, vol. 25(5), pages 1348-1377, November.
    • Handle: RePEc:bla:eufman:v:25:y:2019:i:5:p:1348-1377
    DOI: 10.1111/eufm.12231
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    Cited by:

    1. Muskan Sachdeva & Ritu Lehal & Sanjay Gupta & Aashish Garg, 2021. "What make investors herd while investing in the Indian stock market? A hybrid approach," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 15(1), pages 19-37, September.
    2. Benchimol, Jonathan & El-Shagi, Makram & Saadon, Yossi, 2022. "Do expert experience and characteristics affect inflation forecasts?," Journal of Economic Behavior & Organization, Elsevier, vol. 201(C), pages 205-226.

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