Does decision fatigue affect analysts’ forecasting ability?
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School of Business |
Master's thesis
Authors
Date
2022
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
67
Series
Abstract
As people are required to make increasing amounts of decisions throughout a working day, they may fall prey to decision fatigue - a phenomenon that describes the draining of mental resources. This thesis applies the concept of decision fatigue to sell-side analysts forecasting behavior by building on the recent study by Hirshleifer et al. (2019). I conduct the tests of decision fatigue using two samples of I/B/E/S data. The first data sample covers all one-year ahead EPS forecasts issued in 1994-2021 that include information on the time of issuance and the second one all price target forecasts with a 12-month forecast horizon in 1999-2021. The results using the EPS sample provide support for the findings of Hirshleifer et al. (2019), although I find the economic significance of decision fatigue on analysts’ accuracy to be smaller as they document. The results using the price target sample are contradictory as I find a weak positive effect of decision fatigue on accuracy. Further regressions show that decision fatigue increases the likelihood of herding and decreases the likelihood of bold positive forecasts. I also find weak evidence for a decreasing likelihood of issuing rounded forecasts once analysts are fatigued. There are at least two possible explanations for the differing effect in the price target sample and the EPS sample: decision fatigue’s possible interaction with optimism and analysts’ poor ability to include anomaly information to their forecasts. The results are robust for using only the shared analyst codes in the two samples, using different variations of the variable proxying decision fatigue and adding a “Bundle” dummy to the regressions. The results with the EPS sample also remain qualitatively similar if I use the quarterly EPS forecasts instead of the one-year ahead ones. The findings have several implications for the practice. If analysts can become aware of their decision fatigue, they should try to save their mental resources for important decisions. Brokerage houses as analysts’ employers might benefit from soft measures to combat decision fatigue such as letting analysts structure their work autonomously, building a positive corporate culture of relatedness, and promoting work-life balance.Description
Thesis advisor
Ungeheuer, MichaelKeywords
analyst, behavioral finance, decision fatigue, forecast accuracy, herding