Riding a Tiger without Being Eaten - RePub - Erasmus Universiteit ...

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employers and anyone who uses analysts’ research and recommendations to make
investment decisions. Analysts who follow a particular company longer produce
more accurate forecasts (Clement, Koonce & Lopez, 2007). Learning from past
experience seems to be an important part of forecasting, particularly when taskspecific
experience is considered. Clement et al. (2007) found that analysts who
obtained experience with corporate downsizing and restructuring issues increased
their forecast accuracy by some 8 per cent annually for every year of experience on
companies they follow.
In their article ‘Who Herds?’, Bernhardt et al. (2006) define herding bias as part of a
broader context, writing that (p. 658):
A forecast is unbiased if it corresponds to the analyst’s best estimate of
earnings given all available information, i.e., if it corresponds to the mean
or median of the analyst’s posterior distribution over earnings. In its most
basic form, herding amounts to biasing a forecast away from an analyst’s
best estimate, toward the consensus forecast of earlier analysts; while antiherding
amounts to biasing a forecast away from that consensus.
It is very possible that analysts do herd, in the sense that they may ignore their own
private knowledge/information to follow the rest of the pack. A number of archival
studies, often using mathematical models, provide insight into analyst herding
behaviour. And various studies show that confident analysts are more likely to issue
bold forecasts (Ramnath et al. 2008). Hirshleifer notes, ‘Investors and managers are
often accused of irrationally converging in their actions and beliefs, perhaps because
of a ‘herd instinct’ or from a contagious emotional response to stressful events’
(Hirshleifer & Teoh, 2001). In particular, this last reference to stressful events is
interesting in the context of our research. 2
Investors may herd (converge in behaviour), or cascade (ignore their private
information signals), in deciding whether to participate in the market, what securities
to trade, and whether to buy or sell. Both analysts as well as investors may herd
when deciding what securities to invest in. Analysts may also herd in their forecasts
2 See, for example, Business Week (1998) on ‘Why Investors Stampede: And why the potential for damage is greater than ever,’ or the
advertisement by Scudder Investments in Forbes (10/29/01) with the heading, ‘MILLIONS of very fast, slightly MISINFORMED sheep. Now that’s
opportunity.’