Do Disruptive Life Events Affect How Analysts Assess Risk? Evidence from Deadly Hurricanes

Analysts in the eye of the storm see clouds on the horizon

Bourveau, T., and Law, K. K. F. (2021). Do disruptive life events affect how analysts assess risk? Evidence from deadly hurricanes. The Accounting Review, 96(3), 121-140.

Key takeaways:

• When financial analysts personally experience a deadly hurricane, they subsequently issue earnings forecasts that are significantly less optimistic, even for companies not directly impacted by the hurricane. This effect is causal and not driven by differences in analyst effort.

• The reduction in forecast optimism is strongest for analysts encountering a hurricane for the first time in their location. The effects are temporary though, mostly wearing off within two years after the hurricane experience.

• Analysts appear to rely on the availability heuristic, where the salience of extreme events in memory causes them to overestimate risks. Encountering an unlikely catastrophic outcome makes similar future risks feel more probable.

• These findings demonstrate how professional financial analysts’ personal experiences and psychology subtly influence their judgments and forecasts. Disruptive life events “near to home” cause analysts to perceive the world as riskier.