Leadership

Endogenous Overconfidence In Managerial Forecasts

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Executive Summary

The authors examine whether attribution bias that leads managers who have experienced short-terni forecasting success to become overconfident in their ability to forecast future earnings. Iniportantly. this fonn of overconfidence is endogenous and dynamic. They also exaniine the effect of this cognitive bias on the managerial credibility. Consistent with the existence of dynamic overconfidence. managers who have predicted earnings accurately in the previous four quarters are less accurate in their subsequent earnings predictions. These managers also display greater divergence froni the analyst consensus and are more precise. Lastly. investors and analysts react less strongly to forecasts issued by overconfident managers.

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