Do Teams Alleviate or Exacerbate the Extrapolation Bias in the Stock Market?

Author:

Barahona Ricardo1,Cassella Stefano2,Jansen Kristy A. E.3

Affiliation:

1. Banco de España

2. Tilburg University

3. USC Marshall School of Business and de Nederlandsche Bank

Abstract

We investigate how teams impact return extrapolation, a bias in belief formation which is pervasive at the individual level and crucial to behavioral asset-pricing models. Using a sample of US equity money managers and a within-subject design, we find that teams attenuate their own members’ extrapolation bias by 75%. This reduction is not due to learning or differences in compensation, workload, or investment objectives between solo-managed and team-managed funds. Rather, we provide supportive evidence that team members engaging in deeper cognitive reflection can explain the bias reduction.

Publisher

Banco de España

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