Do investors experience heuristics in earnings forecasting?
Abstract
This research aims to examine empirically the overreliance on representativeness heuristic and anchoring-adjustment influences experienced by investors in forecasting future earnings. This research was a laboratory experiment with a design of 2x2 full factorial between subject. The results showed that representativeness heuristics were only experienced by investors who obtained positive information. Besides, this study also shows that investors do not overreliance on anchoring-adjustment heuristics. Generally, this research shows that cognitive biases occur when the information presented is of good value so that it can be taken into consideration for investors to be more careful in making predictions. Multiple benchmark information can be used as a consideration in evaluating the company’s earnings and stock performance.
Keyword : representativeness, anchoring-adjustment, multiple benchmark information
How to Cite
Praditha, R., Haliah, H., Habbe, A. H., & Rura, Y. (2020). Do investors experience heuristics in earnings forecasting?. Business: Theory and Practice, 21(2), 686-694. https://doi.org/10.3846/btp.2020.12018
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Habbe, A. H., & Mande, H. (2016). The effect of information sequential and personality on the investor belief revision (an experimental study in decision making). PONTE International Scientific Researchs Journal, 72(10), 150–166. https://doi.org/10.21506/j.ponte.2016.10.13
Han, J., & Tan, H. T. (2007). Investors’ reactions to management guidance forms: The influence of multiple benchmarks. Accounting Review, 82(2), 521–543. https://doi.org/10.2308/accr.2007.82.2.521
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Helson, H. (1964). Adaptation-level theory: an experimental and systematic approach to behavior. Harper & Row.
Jame, R., Johnston, R., Markov, S., & Wolfe, M. C. (2016). The value of crowdsourced earnings forecasts. Journal of Accounting Research, 54(4), 1077–1110. https://doi.org/10.1111/1475-679X.12121
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Krische, S. D. (2005). Investors’ evaluations of strategic in earnings announcements. The Accounting Review, 80(1), 243–268. https://doi.org/10.2308/accr.2005.80.1.243
Laih, Y.-W. (2016). Do experts in financial magazines exhibit the representativeness heuristic? Evidence from Taiwan. Accounting and Finance Research, 5(4), 49–62. https://doi.org/10.5430/afr.v5n4p49
Lee, Y. H., Dunbar, N. E., Miller, C. H., Lane, B. L., Jensen, M. L., Bessarabova, E., Burgoon, J. K., Adame, B. J., Valacich, J. J., Adame, E. A., Bostwick, E., Piercy, C. W., Elizondo, J., & Wilson, S. N. (2016). Training anchoring and representativeness bias mitigation through a digital game. Simulation and Gaming, 47(6), 751–779. https://doi.org/10.1177/1046878116662955
Libby, R., Tan, H. T., & Hunton, J. E. (2006). Does the form of management’s earnings guidance affect analysts’ earnings forecasts? Accounting Review, 81(1), 207–225. https://doi.org/10.2308/accr.2006.81.1.207
Lim, T. (2001). Rationality and analysts’ forecast bias. Journal of Finance, 56(1), 369–385. https://doi.org/10.1111/0022-1082.00329
Lo, A. W. (1989). The adaptive markets hypothesis: market efficiency from an evolutionary perspective. Journal of Cellular Physiology, 139(2), 313–319. https://doi.org/10.1002/jcp.1041390213
Monahan, S. J. (2017). Financial statement analysis and earnings forecasting. Foundations and Trends in Accounting, 12(2), 105–215. https://doi.org/10.1561/1400000036
Nahartyo, E., & Utami, I. (2016). Panduan Praktis Riset Eksperimen. INDEKS.
Pompian, M. M. (2012). Behavioral finance and investor types: managing behavior to make better investment decisions. Wiley. https://doi.org/10.1002/9781119202417
Praditha, R., Haliah, H., Habbe, A. H., Rura, Y., & Anwar, A. I. (2020). Accounting information disclosure: single versus multiple benchmark. Hasanuddin Economics and Business Review, 4(1), 22–28. https://doi.org/10.26487/hebr.v4i1.2352
Richie, M., & Josephson, S. A. (2017). Quantifying heuristic bias: anchoring, availability, and representativeness. Teaching and Learning in Medicine, 30(1), 67–75. https://doi.org/10.1080/10401334.2017.1332631
Schrand, C. M., & Walther, B. R. (2000). Strategic benchmarks in earnings announcements: the selective disclosure of prior-period earnings components we have received helpful comments from Ray Ball. The Accounting Review, 75(2), 151–177. https://doi.org/10.2308/accr.2000.75.2.151
Sekaran, U., & Bougie, R. (2013). Research methods for business: a skill-building approach. Wiley.
Shoham, A., & Fiegenbaum, A. (2002). Competitive determinants of organizational risk-taking attitude: the role of strategic reference points. Management Decision, 40(2), 127–141. https://doi.org/10.1108/00251740210422802
Siddiqi, H. (2015). Anchoring adjusted capital asset pricing model. Risk and Sustainable Management Group Working Paper Series. The University of Queensland. https://doi.org/10.2139/ssrn.2686990
Thibaut, J. W., & Kelley, H. H. (2017). The social psychology of groups. Routledge. https://doi.org/10.4324/9781315135007
Tversky, A. (1992). Advances in Prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297–323. https://doi.org/10.1007/BF00122574
Tversky, A., & Kahneman, D. (1973). Judgements under uncertainty: Heuristics and biases. Oregon Research Institute Research Bulletin, 13(1), 201–210. https://doi.org/10.1016/0732-118X(84)90024-2
Wahyuni, S., & Hartono, J. (2012). Reminder effect and anchoring-adjustment in earnings announcements: implementation of prior-period benchmark disclosure strategy. Journal of Indonesian Economy and Business, 27(3), 390–405.
Wahyuni, S., Hartono, J., & Nahartyo, E. (2016). Implementasi Strategi Pengungkapan Informasi Laba Patok Duga Tunggal dan Multipel dalam Rerangka Teori Titik Acuan Ganda. Simposium Nasional Akuntansi XIX, 1–30.
Ying Luo, G. (2013). Can representativeness heuristic traders survive in a competitive securities market? Journal of Financial Markets, 16(1), 152–164. https://doi.org/10.1016/j.finmar.2012.05.001
Bernard, V. L., & Thomas, J. K. (1990). Evidence that stock prices do not fully reflect the implications of current earnings for future earnings. Journal of Accounting and Economics, 13(4), 305–340. https://doi.org/10.1016/0165-4101(90)90008-R
Bloomfield, R., Libby, R., & Nelson, M. W. (2003). Do investors overrely on old elements of the earnings time series? Contemporary Accounting Research, 20(1), 1–31. https://doi.org/10.1506/N8T8-9QR7-YUCX-91X2
Bodie, Z., Kane, A., & Marcus, A. J. (2009). Essentials of investments (8th ed.). McGraw-Hill Companies, Incorporated.
Boussaidi, R. (2013). Representativeness heuristic, investor sentiment and overreaction to accounting earnings: the case of the Tunisian stock market. Procedia – Social and Behavioral Sciences, 81(1974), 9–21. https://doi.org/10.1016/j.sbspro.2013.06.380
De Bondt, W. F. M., & Thaler, R. H. (1987). Further evidence on investor overreaction and stock market seasonality. The Journal of Finance, 42(3), 557–581. https://doi.org/10.1111/j.1540-6261.1987.tb04569.x
Fama, E. F. (1970). Efficient capital markets: a review of theory and empirical work. American Economic Review, 25(2), 383–417. https://doi.org/10.1111/j.1540-6261.1970.tb00518.x
Fiegenbaum, A., Hart, S., & Schendel, D. (1996). Strategic reference point theory. Strategic Management Journal, 17(3), 219–235. https://doi.org/10.1002/(SICI)1097-0266(199603)17:3<219::AID-SMJ806>3.3.CO;2-E
Frederick, S. W., & Mochon, D. (2011). A scale distortion theory of anchoring. Journal of Experimental Psychology: General, 141(1), 124–133. https://doi.org/10.1037/a0024006
Gilovich, T., & Epley, N. (2006). The anchoring-and-adjustment heuristic. Why the adjustments are insufficient. Psychological Science, 17(4), 311–318. https://doi.org/10.1111/j.1467-9280.2006.01704.x
Habbe, A. H. (2017). Estimation error of earnings information: a test of representativeness and anchoring-adjustment heuristic. International Journal of Economics and Financial Issues, 7(1), 224–233.
Habbe, A. H., & Mande, H. (2016). The effect of information sequential and personality on the investor belief revision (an experimental study in decision making). PONTE International Scientific Researchs Journal, 72(10), 150–166. https://doi.org/10.21506/j.ponte.2016.10.13
Han, J., & Tan, H. T. (2007). Investors’ reactions to management guidance forms: The influence of multiple benchmarks. Accounting Review, 82(2), 521–543. https://doi.org/10.2308/accr.2007.82.2.521
Hartono, J. (2004). How, why and when investors revise their beliefs to company information and their implications to firm’s announcement policy. ANDI.
Hartono, J. (2017). Teori Portofolio Dan Analisis Investasi (11th ed.). BPFE.
Helson, H. (1964). Adaptation-level theory: an experimental and systematic approach to behavior. Harper & Row.
Jame, R., Johnston, R., Markov, S., & Wolfe, M. C. (2016). The value of crowdsourced earnings forecasts. Journal of Accounting Research, 54(4), 1077–1110. https://doi.org/10.1111/1475-679X.12121
Kahneman, D., & Tversky, A. (1979). Prospect theory: an analysis of decision under risk. Econometrica, 47(2), 263–292. https://doi.org/10.2307/1914185
Konstantinidi, T., & Pope, P. F. (2016). Forecasting risk in earnings. Contemporary Accounting Research, 33(2), 487–525. https://doi.org/10.1111/1911-3846.12158
Krische, S. D. (2005). Investors’ evaluations of strategic in earnings announcements. The Accounting Review, 80(1), 243–268. https://doi.org/10.2308/accr.2005.80.1.243
Laih, Y.-W. (2016). Do experts in financial magazines exhibit the representativeness heuristic? Evidence from Taiwan. Accounting and Finance Research, 5(4), 49–62. https://doi.org/10.5430/afr.v5n4p49
Lee, Y. H., Dunbar, N. E., Miller, C. H., Lane, B. L., Jensen, M. L., Bessarabova, E., Burgoon, J. K., Adame, B. J., Valacich, J. J., Adame, E. A., Bostwick, E., Piercy, C. W., Elizondo, J., & Wilson, S. N. (2016). Training anchoring and representativeness bias mitigation through a digital game. Simulation and Gaming, 47(6), 751–779. https://doi.org/10.1177/1046878116662955
Libby, R., Tan, H. T., & Hunton, J. E. (2006). Does the form of management’s earnings guidance affect analysts’ earnings forecasts? Accounting Review, 81(1), 207–225. https://doi.org/10.2308/accr.2006.81.1.207
Lim, T. (2001). Rationality and analysts’ forecast bias. Journal of Finance, 56(1), 369–385. https://doi.org/10.1111/0022-1082.00329
Lo, A. W. (1989). The adaptive markets hypothesis: market efficiency from an evolutionary perspective. Journal of Cellular Physiology, 139(2), 313–319. https://doi.org/10.1002/jcp.1041390213
Monahan, S. J. (2017). Financial statement analysis and earnings forecasting. Foundations and Trends in Accounting, 12(2), 105–215. https://doi.org/10.1561/1400000036
Nahartyo, E., & Utami, I. (2016). Panduan Praktis Riset Eksperimen. INDEKS.
Pompian, M. M. (2012). Behavioral finance and investor types: managing behavior to make better investment decisions. Wiley. https://doi.org/10.1002/9781119202417
Praditha, R., Haliah, H., Habbe, A. H., Rura, Y., & Anwar, A. I. (2020). Accounting information disclosure: single versus multiple benchmark. Hasanuddin Economics and Business Review, 4(1), 22–28. https://doi.org/10.26487/hebr.v4i1.2352
Richie, M., & Josephson, S. A. (2017). Quantifying heuristic bias: anchoring, availability, and representativeness. Teaching and Learning in Medicine, 30(1), 67–75. https://doi.org/10.1080/10401334.2017.1332631
Schrand, C. M., & Walther, B. R. (2000). Strategic benchmarks in earnings announcements: the selective disclosure of prior-period earnings components we have received helpful comments from Ray Ball. The Accounting Review, 75(2), 151–177. https://doi.org/10.2308/accr.2000.75.2.151
Sekaran, U., & Bougie, R. (2013). Research methods for business: a skill-building approach. Wiley.
Shoham, A., & Fiegenbaum, A. (2002). Competitive determinants of organizational risk-taking attitude: the role of strategic reference points. Management Decision, 40(2), 127–141. https://doi.org/10.1108/00251740210422802
Siddiqi, H. (2015). Anchoring adjusted capital asset pricing model. Risk and Sustainable Management Group Working Paper Series. The University of Queensland. https://doi.org/10.2139/ssrn.2686990
Thibaut, J. W., & Kelley, H. H. (2017). The social psychology of groups. Routledge. https://doi.org/10.4324/9781315135007
Tversky, A. (1992). Advances in Prospect theory: cumulative representation of uncertainty. Journal of Risk and Uncertainty, 5, 297–323. https://doi.org/10.1007/BF00122574
Tversky, A., & Kahneman, D. (1973). Judgements under uncertainty: Heuristics and biases. Oregon Research Institute Research Bulletin, 13(1), 201–210. https://doi.org/10.1016/0732-118X(84)90024-2
Wahyuni, S., & Hartono, J. (2012). Reminder effect and anchoring-adjustment in earnings announcements: implementation of prior-period benchmark disclosure strategy. Journal of Indonesian Economy and Business, 27(3), 390–405.
Wahyuni, S., Hartono, J., & Nahartyo, E. (2016). Implementasi Strategi Pengungkapan Informasi Laba Patok Duga Tunggal dan Multipel dalam Rerangka Teori Titik Acuan Ganda. Simposium Nasional Akuntansi XIX, 1–30.
Ying Luo, G. (2013). Can representativeness heuristic traders survive in a competitive securities market? Journal of Financial Markets, 16(1), 152–164. https://doi.org/10.1016/j.finmar.2012.05.001