Memory, Retrieved Context, and Bias in Management Earnings Forecasts

The impact of memory on economic choices can be essential, but empirical evidence of the link between them remains scarce (Malmendier and Wachter 2022). This study examines whether the retrieval of memories related to economic recessions affects the changes in the bias in management forecasts. Using the 2008 financial crisis as a memory trigger and focusing on annual earnings forecasts issued by the same CEOs between 2002 and 2018, we find that CEOs with more long-term memories of leading through past recessions and those with more intense recent memories of the financial crisis embed more pessimism in their forecasts after the financial crisis. These findings support the retrieved-context theory in human memory, as well as the availability heuristic and the recency effect in psychology. Further analyses show that it takes about two years for the increased pessimism in management forecasts to return to the pre-crisis level and up to three years for CEOs with more memories of past recessions, suggesting that memory retrieval may delay managers' learning after the financial crisis. Our study offers new insight into the role that memory plays in managers' decision-making.