Commentary: Bounded Rationality: Tapping Investor Behavior to Source Alpha

Evidence suggests behavioral biases creep into the expectations of even the most sophisticated investors — in this case Wall Street analysts. Their influence on stock prices offers a potential source of alpha; if investors can predict how behavioral biases will shape a Wall Street analyst’s estimates, investors might capture excess returns as the market responds to analyst expectations.

Wall Street analysts’ susceptibility to behavioral biases is significant because of their influence on stock prices. Research indicates their opinions — transparent in the form of publicly available earnings estimates — are one of the single greatest company-specific determinants of stock price movement.

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