Beyond Firm Characteristics: Forecaster Heterogeneity Explains a Large Portion of Over and Underreaction

ABSTRACT

A vibrant literature in finance seeks to understand whether subjective expectations exhibit underreaction or overreaction. This literature has focused almost exclusively on characteristics of firms (in the field) or artificial assets (in the lab). We argue that the literature has neglected a substantial source of variation in over and underreaction: forecaster characteristics. Using IBES data, we show that forecaster heterogeneity explains roughly the same amount of variation in over and underreaction as firm heterogeneity. We obtain a similar result using existing laboratory data. Our results suggest that the search for drivers of over and underreaction needs to include forecaster characteristics.