How Much Does Expertise Reduce Behavioral Biases? The Case of Anchoring Effects in Stock Return Estimates

Financial Management, Vol. 37, No. 3, pp. 391-411, Autumn 2008

Posted: 7 Dec 2007 Last revised: 6 May 2009

See all articles by Markku Kaustia

Markku Kaustia

Aalto University

Eeva Alho

Aalto University - Department of Accounting and Finance

Vesa Puttonen

Aalto University - School of Business

Abstract

We use data from surveys involving 300 Scandinavian financial market professionals and 213 university students to conduct three controlled experiments in which we manipulate the background information given to subjects. We find a very large anchoring effect in the students' long-term stock return expectations, i.e., their estimates are influenced by an initial starting value. Professionals show a much smaller anchoring effect, but it nevertheless remains statistically and economically significant, even when we restrict the sample to more experienced professionals. We also find that the professionals are not conscious of the impact of historical returns on their expectations.

Keywords: Behavioral bias, anchoring, return expectations, experience

JEL Classification: C93, D84, G2

Suggested Citation

Kaustia, Markku and Alho, Eeva and Puttonen, Vesa, How Much Does Expertise Reduce Behavioral Biases? The Case of Anchoring Effects in Stock Return Estimates. Financial Management, Vol. 37, No. 3, pp. 391-411, Autumn 2008, Available at SSRN: https://ssrn.com/abstract=1066641

Markku Kaustia (Contact Author)

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Eeva Alho

Aalto University - Department of Accounting and Finance ( email )

P.O. Box 1210
Helsinki, 00100
Finland

Vesa Puttonen

Aalto University - School of Business ( email )

P.O. Box 1210
Helsinki, 00100
Finland
358 407090284 (Phone)
358 0 4313678 (Fax)

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