Expectational reference points and belief formation: Field evidence from financial analysts

Abstract

We test the influence of expectations as reference points in the belief formation of individuals using field data from financial analysts. We explore the premise that deviations from expectations can significantly alter people's perceptions of identical outcomes, thereby affecting their subsequent belief formation. We employ a regression discontinuity design to reveal that analysts whose forecasts were barely exceeded become discontinuously more optimistic than analysts whose forecasts were barely missed, despite having converging prior beliefs and observing the same performance signal about firm earnings. Furthermore, our analyses show that analysts whose forecasts were barely missed update their beliefs more strongly than do analysts whose forecasts were barely exceeded. We contribute to the literature by providing important field evidence indicating that expectations constitute a reference point that influences subsequent belief formation in an environment involving high stakes and expert decision-makers.