Using Counter-explanation to Limit Analysts' Forecast Optimism

Using Counter-explanation to Limit Analysts' Forecast Optimism
Author(s): Kadous, Kathryn and Krische, Susan D. and Sedor, Lisa M.
Year: 2005
Paper Number: GBS-ACC-2005-010
Goizueta Department: Accounting

Abstract

Prior research demonstrates that forecast optimism is, in part, a consequence of analysts' cognitive reactions to the scenarios managers use to communicate future plans. In two experiments, we examine whether counter-explanation (explaining why managers' plans could fail) reduces scenario-induced optimism. We find that when compared to analysts not asked to generate counter-explanations, analysts who complete the relatively easy task of generating few counter-explanations make less optimistic forecasts, but analysts who complete the relatively difficult task of generating many counter-explanations do not. Results demonstrate the usefulness of a cognitive, theory-based mechanism for reducing forecast optimism and suggest a boundary condition for the use of that mechanism.