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Extrapolators and contrarians: Forecast bias and individual investor stock trading

Steffen Andersen^1,2,3; Stephen G. Dimmock⁴; Kasper Meisner Nielsen²; Kim Peijnenburg^5,6,7,8

¹ Center for Economic and Policy Research · ² Copenhagen Business School · ³ Danmarks Nationalbank · ⁴ National University of Singapore · ⁵ Tilburg University · ⁶ Centre for Economic Policy Research · ⁷ Network for Studies on Pensions, Aging and Retirement · ⁸ Ecole des Hautes Etudes Commerciales du Nord

We test whether forecast bias affects household stock trading by combining measures of bias elicited in laboratory experiments with administrative trade-level data. On average, subjects exhibit positive forecast bias (i.e., extrapolators), while a large minority exhibit negative forecast bias (i.e., contrarians). Forecast bias is positively associated with past excess returns of stocks that are purchased: Extrapolators (contrarians) purchase past winners (losers). Forecast bias is negatively associated with the capital gains of stocks that are sold. Furthermore, forecast bias explains investor heterogeneity in the relation between market returns and net flows to stocks. Overall, our study provides evidence of a common mechanism – forecast bias – that links past returns to trading decisions for purchases, sales, and net flows.

DOI

10.1016/j.jfineco.2026.104291

Volume

181

Pages

104291

Language

en

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