Cognitive Biases in Market Forecasts

Abstract

Will the DJIA soar to 36,000 or plummet to 3,600? The desire to know the future is so strong that it blinds us to the fallibility of forecasts. The authors find that P/E ratios and dividend yields provide no help in forecasting one or two–year stock returns, and even ten–year forecasts are far from reliable. They trace the belief that P/E ratios and dividend yields provide reliable forecasts of returns to cognitive errors and discuss statistical and organizational remedies.