Extrapolators and Contrarians: Forecast Bias and Household Stock Trading

Steffen Andersen, Stephen Dimmock, Kasper Meisner Nielsen and Kim Peijnenburg

No 18810, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We test whether forecast bias affects household stock trading by combining measures of bias elicited in laboratory experiments with administrative trade-level data. On average, subjects exhibit positive forecast bias (i.e., extrapolators), while a large minority exhibit negative forecast bias (i.e., contrarians). Forecast bias is positively associated with past excess returns of stocks that are purchased: Extrapolators (contrarians) purchase past winners (losers). Forecast bias is negatively associated with the capital gains of stocks that are sold. Furthermore, forecast bias explains investor heterogeneity in the relation between market returns and net flows to stocks. Overall, our study provides evidence of a common mechanism – forecast bias – that links past returns to trading decisions for purchases, sales, and net flows.

Keywords: Extrapolation; Expectations; Household finance; Experimental finance (search for similar items in EconPapers)
JEL-codes: D81 D84 G11 G41 G5 (search for similar items in EconPapers)
Date: 2024-02
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