Are Expectations Misled by Chance? Quasi-Experimental Evidence from Financial Analysts

We examine whether finance professionals deviate from Bayes’ theorem on the processing of nondiagnostic information when forecasting quarterly earnings. Using field data from sell-side financial analysts and employing a regression discontinuity design, we find that analysts whose forecasts have barely been met become increasingly optimistic relative to when their forecasts have barely been missed. This result is consistent with an update of analysts’ expectations after observing uninformative performance signals. Our results also suggest that this behavior leads to significantly worse forecasting accuracy in the subsequent quarter. We contribute to the literature by providing important field evidence of expectation formation under uninformative signals

Overshadowed by Popularity: The Value of Second-Tier Stars in European Football

While second-tier stars lack popularity compared to superstars, their marginal contribution to team performance on the pitch relative to that of superstars is unknown. Relying on league-specific preseason market value distributions to define superstars and second-tier stars, we compare the marginal contributions of superstars and second-tier stars to team performance on the pitch in the top five European football leagues. Examining the impact of unexpected injury-related absences, we find that second-tier stars’ marginal contribution is at least equal to that of superstars. Thus, the players with arguably the highest costs for clubs do not contribute accordingly to short-run sportive success

The liquidity advantage of the quote-driven market: Evidence from the betting industry

Even though betting exchanges are considered to be the superior business model in the betting industry due to less operational risk and lower information costs, bookmakers continue to be successful.We explain the puzzling coexistence of these two market structures with the advantage of guaranteed liquidity in the bookmaker market. Using matched panel data of over 1.8 million bookmaker and bettingexchange odds for 17,410 soccer matches played worldwide, we find that the bookmaker offers higherodds and bettor returns than the betting exchange when liquidity at the betting exchange is low

When the league table lies: Does outcome bias lead to informationally inefficient markets?

We study whether outcome bias persists in markets with actors who are financially incentivized to make optimal decisions. We test whether inherently noisy match outcomes from European football are correctly incorporated into prices from a betting exchange market. We find that market prices overestimate (underestimate) the winning probability of teams that previously overperformed (underperformed) in terms of match outcomes compared to their performance based on “expected goals”. This pattern is mirrored in negative (positive) betting returns on overperforming (underperforming) teams. These results suggest that even competitive market mechanisms fail to completely erase outcome bias

Replication: Do coaches stick with what barely worked? Evidence of outcome bias in sports

We replicate the finding of Lefgren et al. (2015) showing that professional basketball coaches in the NBA discontinuously change their starting lineup more often after narrow losses than after narrow wins. This result is consistent with outcome bias because such narrow outcomes are conditionally uninformative. As our paper shows, this pattern is not restricted to the NBA; we also find evidence of outcome bias in the top women’s professional basketball league and college basketball. Finally, we show that outcome bias in coaching decisions generalizes to the National Football League (NFL). We conclude that outcome bias is credible and robust, although it has weakened over time in some instances

May Bad Luck Be Without You: The Effect of CEO Luck on Strategic Risk-taking

We investigate how luck, namely, changes in a firm's performance beyond the CEO's control, affects strategic risk-taking. Fusing upper echelons theory with insights from psychology and behavioral strategy research, we hypothesize that there is a positive association between luck and strategic risk-taking and that this effect is stronger for bad luck than for good luck. We further argue that these effects vary depending on whether CEOs have experienced negative events earlier in their professional careers. Measuring luck as the exogenous component of recent firm performance, we show empirically that CEOs react to bad luck by adopting more conservative risk-taking policies while showing no reactions to good luck. This effect predictably varies with the strength of bad luck signals, and it is stronger for CEOs who have experienced negative events during their professional careers. We contribute to the literature by providing the first evidence on the role of luck in corporate strategic risk-taking

Outcome bias in self-evaluations: Quasi-experimental field evidence from Swiss driving license exams

Exploiting a quasi-experimental field setting, we examine whether people are outcome biased when self-evaluating their past decisions. Using data from Swiss driving license exams, we find that candidates who narrowly passed the theoretical driving exam are significantly less likely to pass the subsequent practical driving exam – which is taken several months after the theoretical exam – than those who narrowly failed. Those candidates who passed the theoretical exam on their first attempt receive more objections regarding their momentary, on-the-spot decisions in the practical exam, consistent with the idea that the underlying behavioral difference is worse preparation

Uninformative Performance Signals and Forced CEO Turnover

This paper provides evidence that corporate boards violate the informativeness principle in their forced CEO turnover decisions by failing to ignore uninformative performance outcome signals. I show that CEOs of firms with barely positive shareholder returns in the previous year are less likely to be dismissed than CEOs of firms with barely negative returns, even though this return outcome is conditionally uninformative. I observe a similar pattern for stock returns relative to the S&P 500 index return: a firm's board is less likely to dismiss its CEO if the firm barely outperformed the S&P 500 index than if the firm barely underperformed the S&P 500 index. Moreover, I demonstrate that the tendency of boards to consider uninformative absolute return outcomes has decreased over time, while their tendency to consider uninformative relative return outcomes has increased over time. This suggests that boards have shifted their focus toward relative returns while continuing to violate the informativeness principle

Betting markets as a laboratory for financial studies

This paper investigates the impact of the market microstructure on market efficiency based on data from the betting industry. Similar to financial mar- kets, betting markets are characterized by the coexistence of a quote-driven market structure (bookmakers) and an order-driven market structure (betting exchanges). We show that the quote-driven market exhibits lower market effi- ciency than the order-driven market. Taking advantage of the inefficient odds available at the quote-driven market leads to above-average, and in some cases even positive bettor returns

The performance effects of wise and unwise managerial dissmisals

The decision to dismiss a coach is challenging because poor performance tends to coincide with both bad luck and low coaching ability. We differentiate between dismissals following actual poor performance on the pitch (wise dismissals) and dismissals following seemingly poor performance due to bad luck (unwise dismissals). To categorize dismissals, we use “expected goals,” which are less vulnerable to random variation in match outcomes. Using data from European football, we find that wise dismissals increase subsequent performance compared to a control group of nondismissals with similarly poor performance on the pitch. However, unwise dismissals do not improve subsequent performance compared to a control group with similar strings of bad luck