Using Counter-Explanation to Limit Unintentional Optimism in Analysts' Forecasts

Abstract

Prior research demonstrates that forecast optimism is, in part, an unintentional consequence of analysts’ cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers’ plans could fail) limits unintentional forecast optimism. We find that, when compared to analysts who do not generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results suggest boundary conditions for the effective use of counter-explanation to limit scenarioinduced forecast optimism.