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Equity Theory01:26

Equity Theory

Equity theory explains how our sense of fairness influences the dynamics of close relationships. Rooted in social psychology, the theory posits that individuals evaluate fairness by comparing the ratio of their contributions to the rewards they receive. Relationship satisfaction is highest when these ratios are perceived as balanced between partners, promoting mutual reciprocity and a sense of justice.Equity vs. Equality in RelationshipsEquity is distinct from equality. Fairness does not...
Confirmation Biases01:31

Confirmation Biases

The confirmation bias is the tendency to focus on information that confirms our existing beliefs and ignore information that is inconsistent with our expectations. For example, if you think that your professor is not very nice, you notice all of the instances of rude behavior exhibited by the professor while ignoring the countless pleasant interactions he is involved in on a daily basis. Have you ever fallen prey to the confirmation bias, either as the source or target of such bias?
Social Exchange Theory02:06

Social Exchange Theory

We have discussed why we form relationships, what attracts us to others, and different types of love. But what determines whether we are satisfied with and stay in a relationship? One theory that provides an explanation is social exchange theory. According to social exchange theory, we act as naïve economists in keeping a tally of the ratio of costs and benefits of forming and maintaining a relationship with others (Rusbult & Van Lange, 2003).
Social Exchange Theory01:26

Social Exchange Theory

As formulated by John Thibaut and Harold Kelley, Social Exchange Theory explains human relationships as economic-like exchanges that maximize rewards and minimize costs. This theory suggests that individuals engage in relationships to gain benefits and reduce burdens, similar to economic transactions. It has been widely applied to various types of relationships, including romantic, professional, and social interactions.Rewards and Costs in RelationshipsRelationship rewards include emotional...
Social Proof00:52

Social Proof

Social proof is a form of persuasion based on comparison and conformity. People compare their behavior and actions to what others are doing and will change to conform to do what their peers do.
Self-Evaluation: Self-Enhancement and Self-Verification03:00

Self-Evaluation: Self-Enhancement and Self-Verification

Social psychologists have documented that feeling good about ourselves and maintaining positive self-esteem is a powerful motivator of human behavior (Tavris & Aronson, 2008). In the United States, members of the predominant culture typically think very highly of themselves and view themselves as good people who are above average on many desirable traits (Ehrlinger, Gilovich, & Ross, 2005). Often, our behavior, attitudes, and beliefs are affected when we experience a threat to our...

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Related Experiment Video

Updated: Jun 2, 2026

Applying an eMASS Customization Program as a Research Tool to Evaluate Consumer Benefits
08:27

Applying an eMASS Customization Program as a Research Tool to Evaluate Consumer Benefits

Published on: September 27, 2019

Do Sell-Side Stock Analysts Exhibit Escalation of Commitment?

John Beshears1, Katherine L Milkman

  • 1Graduate School of Business, Stanford University, 518 Memorial Way, Stanford, CA 94305, USA, beshears@stanford.edu , .

Journal of Economic Behavior & Organization
|April 26, 2011
PubMed
Summary

Analysts often stick to their incorrect out-of-consensus earnings forecasts, even when evidence contradicts them. This commitment to an unusual view, known as escalation of commitment, reduces forecasting accuracy.

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Area of Science:

  • Behavioral Finance
  • Financial Analysis
  • Investment Management

Background:

  • Analysts' forecasts significantly influence investor decisions.
  • Understanding analyst behavior is crucial for market efficiency.
  • Previous research has explored forecast adjustments but not specifically escalation of commitment following incorrect out-of-consensus calls.

Purpose of the Study:

  • To investigate whether analysts escalate commitment to out-of-consensus earnings forecasts after experiencing negative forecast errors.
  • To analyze the impact of this behavior on forecasting accuracy.
  • To examine the incentives driving this analyst behavior.

Main Methods:

  • Empirical analysis of analyst forecast data.
  • Comparison of forecast adjustments between out-of-consensus and consensus analysts.
  • Statistical examination of the relationship between forecast errors and subsequent adjustments.

Main Results:

  • Analysts making incorrect out-of-consensus earnings forecasts tend to adjust their subsequent forecasts less towards the actual earnings surprise.
  • This "escalation of commitment" behavior leads to reduced overall forecasting accuracy.
  • No evidence suggests financial incentives drive this behavior; it appears to be a cognitive bias.

Conclusions:

  • Analysts may exhibit an "escalation of commitment" bias, persisting with out-of-consensus views despite contradictory evidence.
  • This behavior negatively impacts forecast accuracy and market efficiency.
  • Understanding this bias is important for investors and financial market participants.