What do Professional Forecasters' Stock Market Expectations tell us about Herding, Information Extraction and Beauty Contests?

Abstract

We study how professional forecasters form equity market expectations based on a new micro-level dataset which includes rich cross-sectional information about individual characteristics. We focus on testing whether agents rely on the beliefs of others, i.e., consensus expectations, when forming their own forecast. We find strong evidence that expectations about the average of all forecasters' forecasts influences an individual's own forecast and that this effect is stronger for young and less experienced forecasters as well as forecasters whose pay depends on performance relative to a benchmark. Further tests indicate that neither information extraction to incorporate otherwise dispersed private information, nor herding for reputational reasons can fully explain these results, leaving Keynes' beauty contest argument as a potential candidate for explaining forecaster behavior.