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Behavioral bias in number processing: Evidence from analysts’ expectations

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  • Roger, Tristan
  • Roger, Patrick
  • Schatt, Alain

Abstract

Research in neuropsychology shows that individuals process small and large numbers differently. Small numbers are processed on a linear scale, while large numbers are processed on a logarithmic scale. In this paper, we show that financial analysts process small prices and large prices differently. When they are optimistic (pessimistic), analysts issue more optimistic (pessimistic) target prices for small price stocks than for large price stocks. Our results are robust when controlling for the usual risk factors such as size, book-to-market, momentum, profitability and investments. They are also robust when we control for firm and analyst characteristics, or for other biases such as the 52-week high bias, the preference for lottery-type stocks and positive skewness, and the analyst tendency to round numbers. Finally, we show that analysts become more optimistic after stock splits. Overall, our results suggest that a deeply-rooted behavioral bias in number processing drives analysts’ return expectations.

Suggested Citation

  • Roger, Tristan & Roger, Patrick & Schatt, Alain, 2018. "Behavioral bias in number processing: Evidence from analysts’ expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 149(C), pages 315-331.
    • Handle: RePEc:eee:jeborg:v:149:y:2018:i:c:p:315-331
    DOI: 10.1016/j.jebo.2018.02.026
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    2. Aloosh, Arash & Ouzan, Samuel, 2020. "The psychology of cryptocurrency prices," Finance Research Letters, Elsevier, vol. 33(C).
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    4. Lin William Cong & Xi Li & Ke Tang & Yang Yang, 2023. "Crypto Wash Trading," Management Science, INFORMS, vol. 69(11), pages 6427-6454, November.
    5. Xavier Gabaix, 2017. "Behavioral Inattention," NBER Working Papers 24096, National Bureau of Economic Research, Inc.
    6. Tristan Roger & Wael Bousselmi & Patrick Roger & Marc Willinger, 2018. "Another law of small numbers: patterns of trading prices in experimental markets," CEE-M Working Papers hal-01954921, CEE-M, Universtiy of Montpellier, CNRS, INRA, Montpellier SupAgro.
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    9. Kelly Shue & Richard R. Townsend, 2019. "Can the Market Multiply and Divide? Non-Proportional Thinking in Financial Markets," NBER Working Papers 25751, National Bureau of Economic Research, Inc.
    10. Roger, Tristan, 2024. "Do financial analysts care about ESG ?," Finance Research Letters, Elsevier, vol. 63(C).
    11. Borsboom, Charlotte & Füllbrunn, Sascha, 2021. "Stock Price Level Effect," MPRA Paper 109286, University Library of Munich, Germany.
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