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Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market?

Author

Listed:
  • Ricardo Barahona

    (Banco de España)

  • Stefano Cassella

    (Tilburg University)

  • Kristy A. E. Jansen

    (USC Marshall School of Business and de Nederlandsche Bank)

Abstract
We investigate how teams impact return extrapolation, a bias in belief formation which is pervasive at the individual level and crucial to behavioral asset-pricing models. Using a sample of US equity money managers and a within-subject design, we find that teams attenuate their own members’ extrapolation bias by 75%. This reduction is not due to learning or differences in compensation, workload, or investment objectives between solo-managed and team-managed funds. Rather, we provide supportive evidence that team members engaging in deeper cognitive reflection can explain the bias reduction.

Suggested Citation

  • Ricardo Barahona & Stefano Cassella & Kristy A. E. Jansen, 2023. "Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market?," Working Papers 2335, Banco de España.
    • Handle: RePEc:bde:wpaper:2335
    DOI: https://doi.org/10.53479/35522
    as

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    File URL: https://www.bde.es/f/webbe/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/23/Files/dt2335e.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    expectation formation; extrapolation; heuristics; teams;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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