Abstract
Alphas have two sources—unique information or the ability to exploit somebody else’s behavioral bias. The research reported here explored the relationship of low and high predictability (past forecast errors of earnings per share) to investor returns. Surprisingly, high-predictability stocks provided higher returns with substantially less risk than low-predictability stocks. The explanation may lie in a behavioral bias: Analysts seriously overestimate the next year’s earnings for low-predictability companies.This presentation comes from the Improving the Investment Decision-Making Process: Behavioral Finance and Decision Theory conference held in Marina del Rey, on April 4, 1995.
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