Are security analysts rational? a literature review

Peixinho, Rúben; Coelho, Luís; Taffler, Richard J.

http://hdl.handle.net/10400.1/5589

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Authors

Peixinho, Rúben

Coelho, Luís

Taffler, Richard J.

Abstract(s)

Rational choice theory and bounded rationality constitute the basis for the discussion in several areas regarding human rationality. In finance, this discussion has been made between traditional finance and behavioural finance approach, which have different perspectives concerning market agents’ rationality. This paper reviews several studies addressing rationality among security analysts. The analysis shows that analysts’systematic optimism seems to be inconsistent with rationality. The discussion of analysts’ optimism is made using two main theories for their biased behaviour: cognitive and economic-based explanations. We review literature on over-optimism, under and overreaction, economic incentives, herding behaviour and analysts’ preference to withhold unfavourable forecasts. The paper concludes with suggestions for further research.