Events

Professor Jesse Davis
Associate Professor of Finance
Associate Dean of the Full-Time MBA Program
UNC Kenan-Flagler Business School
The University of North Carolina at Chapel Hill Campus

We characterize how wishful thinking affects forecasting behavior in the presence of strategic considerations and externalities. Our model provides a unified framework to reconcile recent evidence on the predictability of forecast errors, including underreaction of consensus forecasts and variation in under- or over-reaction of individual forecasts across different economic environments. Furthermore, we show how the interaction of payoff externalities and wishful thinking can lead forecasters, who are exante symmetric, to endogenously “agree to disagree” about public information: while some choose to underestimate the precision of such information, others overestimate it.