In a discussion on BFM Business, Julien Nebenzahl of eToro explores how cognitive biases impact investor behavior during the busy earnings season. He highlights three key biases: the disposition effect, where investors quickly take profits but hold onto losing stocks; confirmation bias, characterized by overconfidence in personal beliefs; and recency bias, which focuses solely on recent information. The segment underscores the emotional complexity underlying market reactions to earnings reports, using ASML’s disappointing announcement as a case study.
(BFM Bourse) – During the busy earnings season, investors often succumb to psychological biases that can cloud their judgment. In a recent appearance on BFM Business, Julien Nebenzahl, a wealth solutions manager at eToro, discussed how these behavioral patterns can influence investor decision-making during this hectic market period.
Earnings season is a crucial time for investors to assess company performance. Recently, 19 companies in the CAC 40 index reported their financial results, showcasing a mix of outcomes.
Julien Nebenzahl addressed the question of whether understanding behavioral finance can assist investors in navigating this information-heavy season on the ‘Tout pour investir’ segment aired on October 21.
According to Nebenzahl, it’s essential to explore this topic, despite the initial perception that corporate earnings reports and behavioral finance are distinct subjects.
‘Companies share data that reflects previous performance and generally lack forward-looking insights or emotional undertones. The prevalent market perception is that the earnings season constitutes a reliable moment of rationality. Essentially, stock price movements should react purely to historical data, devoid of emotional influence. Nonetheless, behavioral finance illustrates that market participants often act irrationally, contrasting with classical finance theories that assume rational behavior,’ he noted.
‘When companies release their results, they do so within a highly subjective market environment driven by expectations. Stock price movements post-publication reflect how actual results align with market predictions, rather than simply absorbing new information,’ continued Nebenzahl.
The Three Key Behavioral Biases
Investors frequently exhibit irrational behaviors across various scenarios, as highlighted by French researchers Mondher Bouattour and Anthony Miloudi in their 2016 study titled ‘Behavioral finance and asset price dynamics: An application using the experimental method.’
Julien Nebenzahl identified three significant behavioral biases that often permeate market trends during earnings announcements.
The first bias mentioned is the ‘disposition effect,’ a well-documented phenomenon in behavioral finance. This describes the tendency of investors to quickly realize gains while holding onto losing positions.
‘When earnings announcements lead to a slight increase in a profitable stock, investors may feel validated and opt to take their profits. Conversely, negative news regarding a losing investment can lead to deeper declines, as investors become trapped in their positions and rationalize their losses,’ he explained. ‘This pattern is a common response during corporate earnings releases,’ he added.
Next, Nebenzahl highlighted ‘confirmation bias,’ which refers to the inclination of individuals to reinforce their pre-existing beliefs. In favorable circumstances following a positive report, investors often neglect thorough analysis and remain steadfast in their prior expectations, failing to reassess their outlook.
Lastly, he discussed ‘recency bias,’ which involves giving undue weight to the most immediate information available at the time of the announcement, overlooking the broader market context.
A Case Study: ASML’s Earnings Warning
To illustrate these biases, Nebenzahl pointed to the recent situation with ASML, a prominent Dutch technology firm. The company, which ranks as Europe’s third-largest by market capitalization, faced criticism for its poorly timed earnings announcement and disappointing results.
‘It’s unusual for a company of ASML’s stature to make such an announcement during trading hours,’ remarked Eric Bleines, CEO of Swiss Life Gestion Privée, during the BFM Bourse segment. The company reported a weak order intake and revised down its targets for 2025.
‘This type of negative news in a downtrend is instructive. For ASML shareholders, this earnings warning could provoke dilemma between holding on a bit longer or selling amid their losses,’ analyzed Nebenzahl.
‘The delayed acknowledgment of the warning amplifies investor anxiety. It’s an emotionally charged situation, illustrating a clear lack of hesitation in their responses,’ he asserted.
During the first half of 2024 earnings season, investors exhibited similar cautiousness, imposing harsh corrections on companies that slightly missed expectations.
In an earlier analysis, stock market reactions were compiled following earnings reports from CAC 40 firms, capturing movements either on the same day or the following day after releases made in the evening, as seen with LVMH and Michelin.
Among the companies with the most significant gains were Teleperformance (+10.4%), EssilorLuxottica (+7.4%), and Legrand (+6.5%), while notable declines included STMicroelectronics, which plunged 13.8% following a lowered sales forecast and Edenred, which fell 13.5% despite better-than-expected results.
‘Market reactions have been noticeably asymmetric – recent announcements of good results have resulted in moderate stock gains, yet negative reports have led to