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The decrease in confidence with forecast extremity

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  • Sonsino, Doron
  • Roth, Yefim

Abstract

A large panel of chief financial officers’ forecasts of the S&P 500 annual returns and four experiments suggest that forecast confidence decreases as the forecasts diverge from zero, in the positive or negative direction. This decreased confidence is reflected in longer forecast intervals, larger perceived volatility estimates, and weaker belief in the accuracy of the predictions. De Bondt’s (1993) forecast hedging intensifies with the extremity of the forecasts, but the decrease in confidence is sustained when the intervals are symmetrized. Imposing cumulative prospect theory preferences on the CFOs, permutation tests show that the decreased confidence delays the response to optimistic expectations and alleviates miscalibration, although the optimistic CFOs still discount the VIX by more than 50%. The paper thus reveals a self-corrective mechanism that partially, but far from fully, offsets the overconfidence hazards.

Suggested Citation

  • Sonsino, Doron & Roth, Yefim, 2025. "The decrease in confidence with forecast extremity," International Journal of Forecasting, Elsevier, vol. 41(3), pages 877-893.
    • Handle: RePEc:eee:intfor:v:41:y:2025:i:3:p:877-893
    DOI: 10.1016/j.ijforecast.2024.07.004
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