Abstract
This paper provides evidence that individuals overweight recent experiences with one task when forming beliefs about other tasks, which I term overgeneralization. Using data on sell-side equity analysts and exploiting the diversity of their industry coverage, I show that analysts overgeneralize bad news from other coverage industries and make overpessimistic earnings forecasts for the focal firms. By comparing analysts who cover the same firm at the same time but experience different news from other industries, my empirical approach ensures that differences in firms' fundamentals cannot drive the results. Furthermore, I document that analyst overgeneralization has significant effects on the stock market: the resulting analyst disagreement increases trading volumes and return volatilities, and the resulting analysts' pessimism leads to temporary underpricing.
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