I" vs. "we

Another interesting article from Richard Thaler, one of the more interesting academic economists:

Professor Roll [and] three French collaborators… investigated a particular form of hubris — narcissism — by using a simple and unobtrusive gauge that has been validated by psychologists: just count the number of times a person uses the first-person pronoun in communication. They found that the more narcissistic C.E.O.’s make more aggressive takeovers at higher prices than their more self-effacing brethren do, and that these aggressive takeovers aren’t as well received by the stock market.

The article also says:

C.F.O.s were asked about their expectations for the return of the Standard & Poor’s 500-stock index for the next year — both their best guess and their 80 percent confidence limit. This means that in the example above, there would be a 10 percent chance that the return would be higher than the upper bound, and a 10 percent chance that it would be less than the lower one.

It turns out that C.F.O.’s, as a group, display terrible calibration. The actual market return over the next year fell between their 80 percent confidence limits only a third of the time, so these executives weren’t particularly good at forecasting the stock market. In fact, their predictions were negatively correlated with actual returns. For example, in the survey conducted on Feb. 26, 2009, the C.F.O.’s made their most pessimistic predictions, expecting a market return of just 2.0 percent, with a lower bound of minus 10.2 percent. In fact, the market soared 42.6 percent over the next year.

…[T]hese executives apparently don’t realize that they lack forecasting ability. And, just as important, they don’t seem to be aware of how volatile the market can be, even in “normal” times.

Posted by James on Monday, August 23, 2010