Cognitive Biases and Beyond in Stock Recommendations

Abstract: Stock recommendations,frequently produced under time pressure, are susceptible to being the result of automatic and intuitive thinking. This is associated with using heuristics in decision-making which is studied by an entire school of research – the heuristics and bias approach. Heuristics of representativeness, availability and anchoring including associated biases as defined by Tversky and Kahneman provide the theoretical framework for the study. This study is aimed at extending the understanding of biases in general and cognitive biases with regard to stock recommendations. A total of thirty equity recommendations were analyzed. A t-test showed that more biases were present in the incorrect recommendations. Overconfidence, illusion of validity and anchoring were among the most frequently observed. The vast majority of recommendations were characterized by insensitivity to predictability indicating that forecasters are seemingly unaware of the difficulty of accurately predicting where the stock price is going to be within the next three to six months.