Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/239646 
Year of Publication: 
2021
Citation: 
[Journal:] Journal of Risk and Financial Management [ISSN:] 1911-8074 [Volume:] 14 [Issue:] 5 [Publisher:] MDPI [Place:] Basel [Year:] 2021 [Pages:] 1-18
Publisher: 
MDPI, Basel
Abstract: 
In this study, we study information processing by financial professionals benchmarked with non-professionals and how correlation among individual forecasts explains the group level forecast performance. In an experiment in which participants make price forecasts based on common financial information, we find that individual professionals are no better than individual non-professionals in forecasting, but professionals' mean forecasts are superior. Our analysis suggests that financial professionals' individual errors are less correlated as they process information from more diverse perspectives. This leads to superior mean forecasts because the uncorrelated individual errors cancel each other out in the aggregate. In contrast, non-professionals are similar in using salient information such as earnings or cash flow. As a result, their individual errors are highly correlated. Instead of cancelling each other out, the individual errors are enlarged in the aggregated mean forecasts. We are the first to show the difference in the comparisons of professionals and non-professionals at the group level versus at the individual level. Our paper contributes to the literature by documenting the evidence of diversity in information processing by financial professionals.
Subjects: 
cash flow
correlation
diversification
earnings
information aggregation
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article

Files in This Item:
File
Size
721.47 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.