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

• Main Author: Matúš Grežo
• Format: Article
• Language: English
• Published: Slovak Academy of Sciences, Centre of Social and Psychological Sciences 2017-07-01
• Series: Studia Psychologica
• Subjects: excessive optimism; financial professionals; forecasting
• Online Access: http://www.studiapsychologica.com/uploads/GREZO_SP_2_vol.59_2017_pp.113-126.pdf

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 future returns of financial assets.