Research Of The Effect Of Experience On Financial Analysts’ Overconfidence

Behavioral finance is the application of psychology findings to financial decision making and financial markets. It has developed rapidly in recent years. One of fields of interest for economists in behavioral finance is overconfidence. Previous studies focus on the overconfidence of investors and managers, and there are few studies on the overconfidence of financial analysts. Therefore, this paper takes financial analysts as the research object, and conducts theoretical analysis and empirical test to explore the generating process and the factors of overconfidence.Based on the well-known research achievements, this paper firstly reviews the emergence and development of behavioral finance, the definition and measurement of overconfidence, the influencing factors of overconfidence, the impact of overconfidence on financial markets and financial decision making, and the relation between experience and overconfidence. Then, this paper collects analysts’quarterly earnings forecasts from the I/B/E/S database. Based on the model of Hilary and Menzly(2006), descriptive statistics analyses are conducted to see if there is a change in financial analysts’forecasting behavior after they experience success, and to see the influence of experience on this process. Next, this paper uses the multiple linear regression models to find the relationship between past success and predictive ability, in order to verify the existence of overconfidence. After that, this paper introduces the experience variable to explore how experience affects the level of overconfidence.The empirical results indicate that:(1) Past success leads financial analysts to be overconfident and then their subsequent earnings forecasts will be less accurate; (2) Experienced analysts will be less overconfident than inexperienced analysts after a series of superior predictions in the preceding quarters. Lastly, according to the above conclusions, some policy suggestions to improve the effectiveness of financial analysts’earnings forecasts are offered.