We expect stocks to rise, but we do not know when and which ones: Excessive optimism in predicting future stock indices returns

Abstract

In this study, we analyze whether: 1) financial professionals manifest lower excessive optimism in predicting future stock indices returns; 2) excessive optimism occurs more when predicting future returns of indices reporting profits than indices reporting losses 3) more long-term predictions are more optimistic than short-term predictions. Three groups of participants (n = 251) -investment managers, financial advisors, and lay men predicted future returns of six stock indices in three forecasting horizons by estimating the 95% confidence intervals. The results showed a high inaccuracy in all three groups. The most accurate group was a group of investment managers, followed by lay men and advisors. We also found that 93% of all incorrect predictions were over-optimistic and excessive optimism was much higher when forecasting stock indices that reported profits in the recent past. T he results of this research did not confirm previous findings about inverse effect of expertise in predicting futu re returns of financial assets.

Comparing personal and social optimism biases: magnitude, overlap, modifiability, and links with social identification and expertise

“…Influence of expertise on personal and social forms of optimism bias (Aim 3). In the personal domain, optimism bias has been found to be reduced (but not totally eliminated) for increasing levels of experience with a to-be-evaluated scenario (e.g., Grezo, 2017;Helweg-Larsen and Shepperd, 2001;Weinstein, 1980). Here, we show that this effect can also be seen in the social domain.…”

“…Third, research on optimism bias has shown an influence of prior experience with a situation (e.g., Grezo, 2017;Helweg-Larsen and Shepperd, 2001;Weinstein, 1980). Generally, it has been observed that personal optimism bias decreases as experience with (or knowledge about) an event increases (Barnoy et al, 2003;Campbell et al, 2007;Cho et al, 2010).…”

Overconfidence and financial decision-making: a meta-analysis

“…Especially financial advisors, who rate themselves as better than others, often show very poor performance (even compared to lay people) in financial analyzing or predicting future prices (e.g. Staël von Holstein, 1972; Glaser et al , 2013; Menkhoff et al , 2013; Grežo, 2017). In such a case, using financial advices and services of overconfident individuals could potentially lead to suboptimal decisions and financial losses.…”