Narrative expectations in financial forecasting

Johnson, Samuel G. B.; Tuckett, David

doi:10.1002/bdm.2245

Cited by 23 publications

(15 citation statements)

References 127 publications

(135 reference statements)

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Events in narratives often have positive or negative valences, motivating approach or avoidance behavior. To test the effect of valence structure on forecasts, participants read about fictitious companies which experienced either good (an increase in earnings) or bad news (a decrease in new oil discoveries), announced prior to the most recent stock price quotation (Johnson & Tuckett, 2022). According to financial theory, there is no further effect on the stock price once the information is publicly revealed and priced in.…”

Section: Simulationmentioning

confidence: 99%

“…Indeed, consistent with CNT but not standard financial theory, news about the future (e.g., a revision to next quarter's projected earnings; +17.5% predicted one-year change) stimulated more extreme predictions compared to news about the past (e.g., a revision to last quarter's actual earnings; +14.7%). Thus, not only the valence but also the temporal orientation of news affects forecasts, in line with narrative representations (Johnson & Tuckett, 2022).…”

Section: Simulationmentioning

confidence: 99%

See 1 more Smart Citation

Conviction Narrative Theory: A theory of choice under radical uncertainty

Johnson

Bilovich²,

Tuckett

2022

Behav Brain Sci

View full text Add to dashboard Cite

Conviction Narrative Theory (CNT) is a theory of choice under radical uncertainty—situations where outcomes cannot be enumerated and probabilities cannot be assigned. Whereas most theories of choice assume that people rely on (potentially biased) probabilistic judgments, such theories cannot account for adaptive decision-making when probabilities cannot be assigned. CNT proposes that people use narratives—structured representations of causal, temporal, analogical, and valence relationships—rather than probabilities, as the currency of thought that unifies our sense-making and decision-making faculties. According to CNT, narratives arise from the interplay between individual cognition and the social environment, with reasoners adopting a narrative that feels ‘right’ to explain the available data; using that narrative to imagine plausible futures; and affectively evaluating those imagined futures to make a choice. Evidence from many areas of the cognitive, behavioral, and social sciences supports this basic model, including lab experiments, interview studies, and econometric analyses. We propose 12 principles to explain how the mental representations (narratives) interact with four inter-related processes (explanation, simulation, affective evaluation, communication), examining the theoretical and empirical basis for each. We conclude by discussing how CNT can provide a common vocabulary for researchers studying everyday choices across areas of the decision sciences.

show abstract

Section: Simulationmentioning

confidence: 99%

Section: Simulationmentioning

confidence: 99%

Conviction Narrative Theory: A theory of choice under radical uncertainty

Johnson

Bilovich²,

Tuckett

2022

Behav Brain Sci

View full text Add to dashboard Cite

show abstract

“…Investors’ reaction to corporate performance reports is directly influenced by the performance expectations of the latter [ 45 ]. Therefore, market reaction to corporate performance reports can serve as a proxy variable of investors’ performance expectations.…”

Section: Literature Review and Research Hypothesesmentioning

confidence: 99%

Will R&D make investors more tolerant? Analysis based on the performance forecast of Chinese listed companies

et al. 2023

View full text Add to dashboard Cite

In the era of innovation dividends, whether investors, as the main participants in the capital market, can tolerate enterprise innovation activities is the key to whether the capital market can help enterprises innovate. This paper takes the listed companies of Shanghai and Shenzhen A-shares in China that disclosed quantitative performance forecasts from 2016 to 2021 as samples, obtains the market reaction of performance forecasts through the event study method and uses them as proxy variables of investors’ short-term performance expectations, and uses multiple regression analysis to explore the impact of corporate R&D on investors’ short-term performance expectations. The results are as follows: (1) corporate R&D investment significantly reduces investors’ short-term performance expectations (that is, investors have a significant tolerance effect on enterprises with higher R&D investment); (2) the increase in the shareholding ratio of institutional investors weakens the tolerance effect; and (3) with the implementation of China’s innovation-driven strategy, the tolerance effect of its capital market on enterprise R&D gradually increases, especially for high-tech companies, but has a low tolerance effect on state-owned companies’ R&D risk. The results show that investors in China’s capital market are not completely rational in their response to corporate R&D, and investors are willing to bear more short-term performance losses for high R&D investment, which is consistent with prospect theory.

show abstract

“…Исследователи уже начали применять положения нарративной экономики для концептуализации и классификации поведенческих стратегий в инвестиционном сообществе. Новаторским и продуктивным представляется подход С. Джонсона и Д. Такетта, которые предлагают разграничивать три типа поведения в части построения прогнозов о будущей стоимости акций: рациональные ожидания из неоклассической экономической теории (инвесторы прогнозируют в соответствии с неоклассической финансовой теорией) и два типа психологических подходов формирования ожиданий: (1) подход поведенческих ожиданий (инвесторы понимают эмпирические рыночные аномалии и ожидают, что эти аномалии произойдут) и (2) подход нарративных ожиданий (инвесторы используют нарративное мышление для прогнозирования будущих цены) [Johnson, Tuckett, 2022]. Как представляется, британские коллеги поставили крайне интересный вопрос в части возможности и целесообразности разграничения поведенческих и нарративных ожиданий.…”

Section: основные отличительные особенности модели «эффективного инте...unclassified

“…В то время как участники с неоклассическими рациональными ожиданиями предсказывали бы рост цен на активы при рыночной норме доходности, участники экспериментов четко различали позитивные и негативные сюрпризы результатов, предсказывая резко превосходящий рост в свете положительных, а не отрицательных новостей. Такое случалось, несмотря на то что прогнозируемые изменения цены были сделаны относительно цены после объявления новостей [Johnson, Tuckett, 2022].…”

Section: основные отличительные особенности модели «эффективного инте...unclassified

Heuristic Model of “Effective Interpreter” in Portfolio Investment in High-Tech Companies

Ilkevich

2022

SDRM

View full text Add to dashboard Cite

The last fifteen years are characterized by a sharp increase in the share of high-tech companies in terms of attracting investment resources in the world's leading stock markets. High-tech companies over this period significantly outpaced value stocks in terms of return on investment. On the one hand, what is happening is a natural process, since in the face of accelerating industry changes, both in traditional sectors and in sub-sectors of the new economy, there are more opportunities for the emergence of companies with disruptive innovations. High market capitalizations of such companies are a natural metric of fundamental shifts in the economy. On the other hand, the very nature of investment decision-making is changing, since an objective assessment of the intrinsic value of the business of high-tech companies is becoming vaguer, more controversial, dependent on future scenarios, and subject to interpretations. And these interpretations, according to the theory of reflexivity, are increasingly having a feedback effect on fundamentals, especially in high-tech companies.The purpose of this article is to conceptualize a new heuristic model of the “effective interpreter”, which, in the conditions of high reflexivity and narrative contexts of the stock market, has significantly diverged across a number of key attributes from the traditional model of the “rational investor”. The author compares the two models. The process of divergence of the two models occurs under the influence of a number of behavioral heuristics and cognitive biases. At the same time, the author emphasizes that a high narrative component in the value of companies does not always and necessarily mean the predominance of irrationality. Here it is more correct to assume some correlation between the rise of narrative decision contexts and the cognitive challenges of investment decision makers.As one of the possible directions for further research, the author notes the systematization of the main factors of cognitive biases, which seem to make switching to the “effective interpreter” model in portfolio investments in high-tech companies irreversible in the current conditions.

show abstract

Narrative expectations in financial forecasting

Cited by 23 publications

References 127 publications

Conviction Narrative Theory: A theory of choice under radical uncertainty

Conviction Narrative Theory: A theory of choice under radical uncertainty

Will R&D make investors more tolerant? Analysis based on the performance forecast of Chinese listed companies

Heuristic Model of “Effective Interpreter” in Portfolio Investment in High-Tech Companies

Contact Info

Product

Resources

About