Expert Forecasts: Fast, Frugal, Flawed §

We conduct a natural field experiment with financial market professionals and document that they rely too often on intuition as opposed to deliberate reasoning, resulting in a significant bias in their expert forecasts. There is a significant difference between professionals ’ expectations when they are asked to forecast stock price levels or stock returns- two questions used interchangeably in real-world surveys. The difference constitutes a significant violation of the procedure invariance assumption of normative decision theory. The reason for professionals to rely too often on their flawed intuition lies in an extreme confidence, a characteristic of intuitive responses. The tendency to rely on intuition also differs between both forecast domains: Fast, confident and evidently flawed responses are often provided whenever subjects forecast price levels, the domain they are more comfortable with, as opposed to returns