Confirmation Biases in the Financial Analysis of IT Investments

Abstract

This paper focuses on the optimistic and confirmation biases of experts with respect to major IT investments and their interaction with financial analysts’ competencies in finance and information technology. We used an experimental design that involved asking subjects to predict the financial market’s reaction to major IT investment announcements. Drawing on the literature on optimistic biases, we showed that IT and financial expertise lead to different forecasting patterns. We found that financially competent participants are more subject to confirmatory biases and have a tendency to hold on to a currently favored hypothesis throughout their analysis. IT expertise, though, mitigates the analyst’s confirmatory bias, so that dual expertise leads to less optimistic biases.

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