Harmful Effects of Seemingly Helpful Information on Forecasts of Stock Earnings

Abstract

Decision makers have expanding access to business information via computerized news retrieval systems. A greater understanding is needed about how this news retrieval informa- tion influences their performance and confidence. MBA students from an advanced finance course forecasted stock earnings using a computerized information system designed to simulate systems used in practice. Disguised actual company data were presented in three different treatments: baseline information, baseline plus redundant news information, and baseline plus nonredundant news information. The redundant information made subjects significantly more confident in their forecasts compared to the baseline case. The nonredun- dam information made subjects significantly more confident than both the baseline case and the redundant case. Forecast accuracy, however, was significantly diminished in both the redundant and nonredundant conditions compared to baseline. Thus, the additional news information, whether redundant or nonredundant, had the effect of degrading performance while increasing confidence. This indicates that decision makers may be poor judges of the usefulness of newly available information sources, and may be influenced by information that does not improve their performance under the false impression that it is helpful. Journal of Economic Psychology, June 1994, 15(2): 253-267. (Reprinted with permission of North Holland Publishing Company.)